How Much Money Do You Need to Buy a Home?
If you are a new home buyer or just starting to look into buying your first home, you have likely looked at some of the listings in your area and wondered whether you can afford that newly remodeled condo with the rooftop deck and private pool.
Sure looking at million dollar listings is fun, but determining a realistic price range for your home search is a vital step. Not only will understanding the amount you can borrow help you save time, but it will also help you determine the amount you will need to save for a down payment.
Speaking with a mortgage lender will help you determine the price range, and it is important to note that pricing will differ depending on if you want to buy a condo, single family home, or multi-unit building.
One of the first things most real estate agents ask for from a prospective buyer is something called a pre-approval letter. A pre-approval letter is a document prepared by a mortgage lender certifying that you are pre-approved to purchase a home up to a specific price. Typically, this amount is determined by looking into your credit score, down payment amount you plan to pay, and any other outstanding loans or recurring monthly payments you have.
Most lenders use a figure around 30% to calculate the amount you can afford to pay monthly on a mortgage. Each company uses its own formula and percentage, but typically the cap is 32% of your monthly income going towards housing payments, which include HOA dues or fees, private mortgage insurance (PMI), and property taxes. Another figure they examine is your debt-to-income ratio, to ensure that the loan amount you receive, combined with your other debts and recurring payments do not exceed the 40% mark. Again, these numbers are an average, so be sure to check in with a lender to be sure!
To help you better understand this, we broke down what three different home buyers can afford in Chicago, by looking at their monthly incomes and debts.
Planning for a home purchase takes time, and knowing what you’re getting into will help you better plan for the expenses. Getting together a down payment, keeping other debt payments to a minimal, and making sure your credit is in good standing before starting your search are things you can start working on now. Having a rough figure of what you can afford is a great way to start planning, but it is ultimately just a starting point. The best way to get an accurate number is to get a mortgage pre-approval letter. If you are ready to start your search, reach out to get started with one of RNP’s experienced agents. Our agents can help you determine your budget and connect you with a lender to get your pre-approval process started.
RNP Real Estate Group is a division of Vesta Preferred Realty.