According to data from California’s Legislative Analyst’s Office , monthly payments on a “typical” California home with a 30-year mortgage and 10% down payments are $5,500. That means to afford a home based on the standard formula, you’d need a monthly gross income of at least $19,650, or $235,800 per year. The average annual salary in California, as of May 2024, is just $62,007, according to ZipRecruiter. Even if you double that for a two-income household, it doesn’t approach what’s needed to buy a home.
Granted, housing costs in California are higher than in many other states. But, buyers all over the country face similar challenges in finding affordable housing.
Fortunately, with proper preparation and some expert tips, you can afford the home of your dreams without sacrificing your current lifestyle or your emergency savings account.
Work With An Expert To Understand How Much House You Can Really Afford
In addition to the 28% rule , there’s another ratio lenders look at that is just as important: the debt-to-income ratio, or DTI.
“DTI is a basic calculation that considers what percentage of your gross monthly income goes toward paying debts. Generally, you want to try to keep your DTI under 36… This is a basic safeguard that lenders put into place to help ensure that the mortgage would be sustainable and that the customer doesn’t end up being house poor,” said Felton Ellington, community lending manager for Chase Home Lending .
Create a Budget Based Around Mortgage Payments
Ellington said it’s important to understand the specifics of your own budget before applying for a mortgage. Your DTI doesn’t paint the whole picture of your financial situation.
“The typical expenses you incur that are not accounted for, like car insurance, food, gas, cell phone, entertainment, etc. are also factors you need to keep in mind. Having a good visual of your monthly debt and expenses is good to have handy when budgeting for a new mortgage payment,” Ellington said.
Start Making Your Mortgage Payments Before You Buy
Regardless of your debt or expenses, one way to ensure you can afford your monthly mortgage payments is to start making those payments — to yourself — before you buy a home. “Before you become a homeowner, consider practicing your payment to prepare yourself for what it will be like to have a mortgage,” Ellington suggested. “This will help get you financially and mentally prepared for the investment. To make it easier, you can even automate your savings.”
When you’re ready to buy, you can put that money toward a down payment, or use it to pay down other debt to improve your DTI.
Choose a Home That Fits Your Budget
Taking these steps will help you understand how much you can afford to pay for a house. But don’t let emotions get in the way of your choice, experts warn.
“While it can be tempting to spend more than your budget for a home that meets everything on your wish list, it’s important to ensure you’ll be able to sustainably afford the home over the life of the mortgage loan,” Ellington said.
Likewise, don’t get swept up into a bidding war just because the market is tight. “In a booming market, it is important to understand the real value of the home you want to buy,” said Omer Reiner, a licensed realtor and owner of FL Cash Home Buyers LLC . “[Don’t] fall in love with a home that is looking for a price at the top of or over your budget. Paying more than the home is worth can cause ripple effects for potentially decades.”
Understand All the Costs That Come With Closing
Once you’ve agreed on a selling price, be sure you understand what’s expected on closing day. “When purchasing a home, buyers should understand that the down payment percentage doesn’t necessarily include other fees such as title costs. Knowing the full extent of fees plus the core home purchase price is key,” Reiner said.
Keep Some Cash in Reserve
Ideally, you’ll be able to maintain cash reserves in an emergency savings account for inevitable home maintenance and repair costs.
“Establishing an emergency fund is a good way to protect against the unforeseen,” Ellington said, recommending that you keep three to 12 months of expenses in a savings account. “Just remember that the money in your emergency fund isn’t meant to be used for your down payment, moving, or closing costs. It’s your buffer for managing the cost of unforeseen situations.”
Reduce Your Down Payment
If your budget indicates you can afford higher mortgage payments, you can keep some extra cash in the bank by reducing your down payment.
First-time homebuyers may qualify for an FHA mortgage, requiring just 3%, while U.S. veterans may qualify for a VA loan, requiring as little as 0% down.
Also check with various mortgage lenders to see what programs are available for your circumstances. For instance, Ellington pointed out: “Our Chase DreaMaker mortgage offers down payments as low as 3% and flexible credit guidelines.”
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