With 30-year mortgage rates still under four percent, you and your wife have been talking about looking at a bigger house. The kids aren't getting any smaller, both of you are working remotely, and a home office would be great.
Add in the benefits you'd get with the inflation factor and rising house prices, and this seems like the right time to look at home buying. But the big question is how much can I afford? What should we be looking at before we commit?
Let's take a look at the different things to consider.
Home Buying Considerations
There are plenty of formulas giving you a good idea of how much home mortgage to consider taking on out there, and mortgage calculators can run the actual numbers for you. But those are just the basics. You should also take an honest look at some more personal factors.
Household Income
Before you commit to a 30-year mortgage, get out your crystal ball and look at the future as realistically as you can.
Where do you see your household income going? Are your jobs secure? Are both of you planning to keep working full-time? How's your industry's future looking?
Are you planning on having more children? Are there any health issues that you should take into consideration?
Of course, no one can predict the future, but you can prepare for it by asking yourself these questions.
A basic rule of thumb says that you shouldn't spend more than 28 percent of your household income on your mortgage and interest and that another eight percent should cover all of your other debt. So how do your numbers stack up right now? How do they look, as best as you can tell, in the future?
Debts vs. Income
You might have a sophisticated home budget spreadsheet with lots of lines, or you might not. Either way, you need to know how much debt you have to pay every month.
These are your fixed, non-negotiable costs - mortgage, utilities, car payments, credit card debt, internet, cell phone - and they shouldn't exceed 40 percent of your income. That's your debt ratio. You'd like that number to be much less, but the 25 - 40 percent range is where most households are.
Why 40 percent? Because the 40 percent number is the upper limit most lenders use when evaluating mortgage applications. If you're carrying more debt than that, securing a mortgage will be much more challenging. In terms of qualifying for a mortgage with good rates and down-payment, you'll be in much better shape when you're well under 40% debt to income.
Anything you can do to lower your debt without wiping out your emergency fund is worth it. For example, are there some credit card balances you can pay off? If yes, that's worth doing.
Credit Rating
You probably have a good idea of your credit score, but if you don't, get your free credit report - everyone's entitled to one free report per year.
Check it over carefully. Your credit score is probably satisfactory if you don't see any issues or errors. A good score? Anything over 700 is good, and an excellent score is anything over 800.
On the other hand, if you've had some late payments or see some outright errors on your report that might put you below 700, then it's worth paying to get your score. You don't want any surprises when it comes time to approach lenders - and remember that better credit scores mean lower interest rates and less down-payment.
Cash Reserves
Financial planners like to say that you should keep an absolute minimum of three to six months worth of household expenses in an emergency fund. And that's on the low side.
The amount that's right varies based on personal circumstances. For example, how much equity do you have? How long would it take you to find a new job (the average time is eight months, by the way)?
Once you've set aside your emergency funds, you'll be in a far better position to know how much of a down-payment you can make on your mortgage.
Comfort vs. Risk
When you ask yourself the question, 'how much mortgage can I afford,' it's important to remember that each of us has a different comfort level regarding financial risk. A relatively high debt to income ratio isn't a problem for some of us.
And then, for some people, any debt is enough to cause sleepless nights. Most of us fall somewhere in the middle. Remember that it's essential to be comfortable with whatever your personal situation is wherever you are on the scale.
Home Buying
You've taken the time to consider all of these factors, and you've got the answers you need. You know your debt to income ratio, you've used your crystal ball, your credit score is good, and your cash reserves are all set.
$485,000 is the number you came up with. So you and your wife are comfortable looking for a home in that price range. Now the fun part begins, and that's starting the actual search for your next house!
The next step is to contact a realtor who can lead you through the process of looking for the perfect home.
Since you want to stay in the Clemson area, you want someone who knows the area - and the real estate market - like the back of their hand. And because buying a house is the single biggest investment most of us ever make, your agent has to be someone you trust.
The Bottom Line
With low mortgage rates and the benefits you'll get from inflation over the life of your mortgage, now's a great time to look into home buying! You and your wife are both comfortable with the price range you'll be looking at and confident the numbers are all in line.
Now's the time to start talking to an experienced, trusted local agent - giving them all of the details of what you're looking for - and allow them to begin working for you. They'll guide you through the process as smoothly as possible. Oh, and don't forget to mention you need that home office!
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