What’s Your Home Buying Power?
If you’re in the market for a new home or investment
property, one of the first questions you’ll probably ask is, “What can we
afford?” Many buyers become so caught up in how much they can afford that they
don’t realize their total buying power—that is, the total amount of
purchasing potential they actually have.
Buying Power Defined
Your buying power is comprised of the total amount of money
you have available each month for a mortgage payment. This means the money you
have each month after fixed bills and expenses. Any money you’ve saved for a
down payment, the proceeds from the sale of your current home, if applicable,
and the amount of money you’re qualified to borrow all impact your buying power
as well. When you take all of this into account, you may find you are able to
purchase a larger home or a home in a more desirable neighborhood, or you might
realize you should be looking for homes in a lower price range.
Why Buying Power
Matters
A common misunderstanding is that a home’s list price
determines whether or not you can purchase it. Although it’s important to look
at the price tag, it’s essential to consider what your monthly payment will be
if you own the home. After all, the purchase price doesn’t include the
housing-related expenses, such as annual property taxes, homeowner insurance,
associated monthly fees and any maintenance or repairs. Figuring out the
payment will prevent you from overestimating or underestimating your buying
power. After all, you’ll live with your monthly payment, not the sales price.
Once you have clarity on your buying power, you’ll be able
to buy the home you want, instead of settling for a home because you feel it’s
the only one you can afford. It will also prevent you from becoming “house
poor,” a common term for someone who’s put all their money toward the down
payment, leaving them nothing left over for fees outside of their monthly house
payment. Both scenarios can negatively impact the lifestyle you want to live.
Understanding your buying power can help you get the home you want without
sacrificing the lifestyle you desire.
If you haven’t sold
your current home yet, a Comparative Market Assessment (CMA) will give you a
general idea of how much you may get for your home based on what other homes
have sold for in your area. Contact our team for a FREE CMA!
Calculating Your Buying
Power
You might be wondering, “How do I know what my buying power
is?” Buying power is calculated by adding the money you’ve saved for a down
payment and/or the money you made from selling your home (minus fees and
mortgage payoff) to all of your sources of income and investments that could be
used to make your monthly payment. Make sure to include your monthly pay,
commissions or tips, dividends from investments, payments from rental
properties or other monthly income you receive as well as the loan amount
you’re willing to finance and qualify for.
Most lenders advise buyers to spend no more than 35 to 45
percent of their pretax income on housing, meaning all your income and sources
of revenue prior to paying taxes. Make sure you factor in not only your
mortgage payment, but also property tax and home insurance to the cost of
housing.1 However, other financial experts advise spending no more
than a very conservative 25 percent of your after-tax income. Whether you plan
to spend the average, play it conservative or split the difference is up to
you.
Traditionally
mortgage lenders have targeted the ideal housing expense amount to be a ratio
of 28 percent or less.2
However, these figures bring up an important point: you
don’t have to spend all of your savings and available monthly income on a
mortgage payment. It’s important to set money aside for regular home
maintenance, unexpected repairs and monthly fees, such as a condominium or
homeowners association fee. While the above ratios are commonly accepted, a
lender will look at your total financial picture when they decide how much
they’re willing to lend. It may be tempting to take out a large loan in order
to purchase the home of your dreams, but keep in mind the less money you have
to borrow, the stronger your buying power may be.
Want to see what your
buying potential is? Head to our blog to find out! [link to blog
post on your website]
How to Save for a Down Payment
One way to boost your buying power is to put down a good
amount of money when you’re ready to buy, meaning you will have to borrow less.
Here are some tips to make saving for a down payment easier.
First-time buyers:
1. Set a savings goal.
One way to figure out how much to save is to use the average sales price for
homes that are similar to what you want and figure out your target down payment
percentage. For example, if homes are selling for $200,000 in your area and you
want to put 20 percent down, you’ll have to save $40,000. Set a goal to save
that amount within a specific time frame; just keep in mind the longer you
save, the more the average selling price will change. Although the majority of
buyers saved for six months or less, 29 percent of all buyers (and 31 percent
of first-time buyers) saved for more than two years for a down payment.3
2. Cut back on
expenses. Review your monthly
expenses and look for ways to save. Twenty-nine percent of buyers cut spending
on non-essentials items and 22 percent cut spending on entertainment while they
were saving for a home.3 Think about items you can live without or
cut back on temporarily while you’re saving.
3. Look for ways to
boost your income. Get a side
job or sell items online or at a
garage sale to increase your income in a short amount of time. Be sure to save
any windfalls you get, including your annual income tax refund or work bonuses.
4. Check out home-buying programs. Your state, county or local government
may offer special programs, such as grants, for first-time buyers to use.
5. Ask your family. Thirteen percent of all buyers, and 24
percent of first-time buyers, were given money from family or friends to use
toward the down payment of their home.3
Repeat buyers:
More than 52 percent of repeat buyers used the proceeds from
the sale of their primary residence toward the down payment on their next home.3
Similarly, 76 percent tapped into their savings accounts.3 If you’re
thinking of buying another home, here are more ways to save more money, in
addition to the tips listed above:
1. Rent a room. If you have an income flat (or
mother-in-law unit) attached to your home, rent it out and channel the income
into a high-interest savings account.
2. Make your money
work for you. If you don’t plan
to buy for at least five years, invest it and let the compound interest work
for you. Discuss this option with your financial planner or broker to see if
this is ideal for you and your goals.
3. Tap into your 401(k). If you have a 401(k) plan, you may be
allowed to borrow a portion of it, the lessor of up to $50,000 or half of its
value, for your down payment. Remember, it’s a loan so you’ll have to pay it
back. If you leave or lose your job before you’ve repaid the loan, you’ll have
between 60 to 90 days to repay the balance or face stiff taxes and penalties.
If you want to buy an
investment property
Whether you’re buying a second home or a rental property,
here are a couple tips to save for a down payment.
1. Tap into your
equity. If you’ve paid off or
paid down your mortgage on your primary home, you may be able to tap into your
equity to purchase another property. Contact your lender to learn more about a
HELOC or home equity loan.
2. Get a partner. Find a friend or relative who’s
willing to purchase property with you. Typically, you’ll split the costs and
profits equally. Just make sure to work with an attorney to create a
partnership agreement to fit your situation.
Do you want a clearer picture of your buying power? Would
you like to see what kind of homes you can get with your buying power? Give us
a call!
2. Credit.com https://www.credit.com/loans/mortgage-questions/how-to-determine-your-monthly-housing-budget/
3. National Association of REALTORS, 2016
Profile of Home Buyers and Sellers
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