One critical step in the home search process is determining how much to spend on housing. The amount that you ultimately spend on housing is personal, and will of course be limited depending on fund available (either through income or loans). But, it is important to consider how much you want to spend carefully, and to take into account both up front costs and ongoing costs.
Up Front Costs:
Down payment
Upgrades or repairs before moving in, or immininently,
Additional furniture
Moving costs
Closing costs
Ongoing Costs:
Monthly mortgage payments,
Insurance,
Maintainance,
Taxes, etc.
There are many online calculators that use inputs like how much you have for a downpayment, income and total debts and it will tell you the maximum amount that a bank might give you as a loan. Sure, using the maximum will buy you a nicer or bigger house, or in a better area, but do you want to spend the maximum possible on housing?
How Much Will the Bank Loan You?
On the other hand, banks will generally want to make sure that you will not have trouble repaying the loan. Usually, they want the amount you spend on housing costs, including mortgage, taxes and insurance to be less than 36% of your total gross income. Also, housing costs plus other monthly debts should be less than 42% of your gross income.
Investors Rule of Thumb
One general rule of thumb used by some investors, and that is advocated on the investing blog “Get Rich Slowly” is to spend less than 25% of your monthly take home pay on housing. This way, you will not feel “pinched,” and will have plenty of money for the remainder of your needs, wants and hopefully, other investments and savings.
Your buyer’s agent can also help you develop a realistic picture of your housing budget. Then, once the home search begins, can help you get an idea for how much different home repairs needed on the particular home you are interested in, closing costs, etc.
The important thing is to make sure you leave yourself plenty of room for other costs and expenses in your life, helping you live comfortably and with peace of mind.
