I’m about to impart on some of those out there with a little bit of knowledge on finding out if you can handle a fixed rate mortgage without major changes to your standard of living.
What I’m about to lay out applies only to those who are already on financially stable footing. This means you are currently NOT living with your parents due to your limited financial position, facing bankruptcy, etc. Of course, I am not ridiculing anyone living with their parents. I, myself, may someday have to fallback on this option. No point in being insolvent AND a hypocrite when that day comes.
You have a steady job and have been working there for more than 3 years. You find yourself in a position where every month you seem to have excess money available. You do not cringe when the credit card statement comes due nor do you hide from the mailman. You, good sir/young madam, have your financial house in order.
You have a yearning to own a place to put your boots and hang your hat for long term (greater than 5 years). You are the exact candidate for my simple test to see if this yearning is a mere fancy or a long term commitment you will be able to withstand.
Determine the price range of your intended purchase and the length of your loan term. My recommended loan amount is around 2-3 times your yearly take home pay (average for the last 3 years). If you make $60K a year, then the maximum recommended is somewhere between $120-$180K. This will vary from region to region, but it should never be more than 3 times. I will expand on this later. If your take home pay swings greatly from year to year, then use the lowest amount of the last 3 years in the calculations to follow.
Go to the new sliced bread known as Google ™ and look up “loan calculator”. The first 10 items will most likely yield websites which calculate monthly mortgage payments for you. The only thing I want you to have control over is loan amount and the option of either a 15 or 30-year term. Use 10 percent for the interest rate. There’s a reason why I want you to do this. First, it includes pretty much everyone from those with the worst credit to those whose credit score makes everyone look bad. Second, this is for what I call worst case scenario, because basically that’s what we’re currently in right now. If you can get a loan, expect it to be somewhere in this neighborhood even if your credit score is gold-plated.
The monthly payment for a $250K loan for 30-year mortgage is $2193.93 as calculated at Bankrate. If this amount is a staggering sum for those who are considering a loan of this size, then it’s probably not the time to buy a house and you should stop reading this altogether. If this monthly amount doesn’t make you light-headed, then take this amount and add in the monthly cost of insurance, utilities and property taxes (if it applies) for the area of the property in question. The average cost of insurance is around $100-$150/month. The average cost of utilities (electricity and water) is around $300-$500/month. The average property tax rate is ~1-3% of your appraised property value. Notice I said “appraised”, because this value will increase on a yearly basis for everyone. So a house appraised at the time of purchase is the amount the buyer paid for it. It will more likely increase than decrease year over year. So a house bought at $250K will have a starting property tax payment of $210-$625/month. Remember that this value will likely increase with every passing year based on the appraised value of the house. Add on to this already significant amount, the average monthly cost of home maintenance. Examples of home maintenance would include fixing a broken AC/heating system or patching the roof. Like all things in life entropy wears things down. To keep this simple let’s assume $3000/year or $250/month of maintenance for the life of the loan. So the monthly cost of a house is now at ~$3100. This figure excludes any discretionary spending such as food, clothing and entertainment. Let’s figure those combined at around $6000/year or $500 a month. This assumes of course your living condition is static. This assumption would have to apply to your job, marriage, kids and unforeseen medical problems. In the non-theoretical world, all of these things change. So, tack on another $500/month as contingency to account for these possible life-altering changes. At last the total required after taxes income of a person with the desire to own a house originally bought at $250K is $4725 per month.
If the final calculation as I laid out is within your means, and you still have a desire to live under a roof you call your own (technically not the case until the last mortgage payment), then read on.
Before you can even begin to start paper work, I recommend you have at least 5-10% of the cost of the house for down payment as well as an additional 5% of the cost of the house for amenities. This is for furnishings such as appliances and furniture. If you already have these things, then that’s great, but it’s more likely that you don’t. Reserve another 7-8% for commissions and closing cost. So to prepare your finances to buy a house for which you’re willing to pay $250K, you should have around $58K by the time of closing. This last figure is flexible. You can hold off on amenities for a year or two and pare this down to $45K.
If the figures I’ve laid out are agreeable to your finances then society would be happy to have you as a homeowner.