You’ve decided – you’re done with renting and are committed to buying a home. Congratulations! There are so many decisions to make! Where do you want to buy? What kind of home appeals to you? How much sweat equity are you willing (and able) to put in? But the very first question you should be asking is: what is my price range? Another way to ask that is: how much house can I afford? The answer will play an important role in answering all of those other questions.
Here’s a tool that can help: NerdWallet.com. NerdWallet is a personal finance website that helps people make and manage financial decisions. Their “How Much House Can I Afford?” tool walks you to that answer step-by-step. Let’s go through it and see how it works.
Where Do You Want to Buy a House?
The NerdWallet tool asks you to input a city name or, even better, a specific zip code. That’s because interest rates vary by state, and property taxes can vary by county. For this run-through, let’s assume you want to buy in the coveted Cherry Creek School District in the 80015 zip code.
What is Your Income Before Taxes?
As you might expect, this is the biggest factor in determining how much house you can afford. Be sure to input your total household income before taxes. If you are buying with a partner, include theirs. For our example, let’s go with the median (or most common) household income level in the Denver metro area – roughly $73,000 according to the Metro Denver Economic Development Corporation. That matches up well with the recent study by GOBanking Rates showing the minimum salary needed to purchase a median-priced home in each state — $74,000 for Colorado.
How Much is Your Downpayment?
Before you panic, please remember that there are LOTS of mortgage programs that require only $1,000 down. There are even programs that make downpayment grants that don’t need to be paid back. See my blog article “Real Help for Affording Your First Home” for details.
The conventional advice of putting 20% down relates to qualifying for a conventional mortgage and avoiding private mortgage insurance. While those are great goals, they are not always achievable – or necessary – for every buyer.
For this example, let’s enter $15,000. That’s a realistic number for most people to achieve between savings and gifts.
How Much are Your Minimum Monthly Debt Obligations?
Add up your minimum monthly debt obligations for credit cards, student loans, and car payments. Do not include current living expenses such as rent or utilities. NerdWallet and others recommend a debt-to-income ratio of no greater than 36%, with no more than 28% going to your mortgage. For this example, let’s enter $450.
What is Your Credit Score?
Your credit score has significant impact on your ability to qualify for a lower mortgage interest rate. This will save you money every month and could save you tens of thousands or more over the life of your mortgage. NerdWallet defines the various credit scores as Excellent (720-850), Good (690-719), Average (630-689), and Poor (350-629). For this example, let’s assume you have an Excellent credit score of 745.
So, How Much House Can You Afford?
NerdWallet’s tool took our input, crunched the numbers, and came up with a home price of $264,242. Will that get you a 4 bed, 3 bath, 2,500 square foot home with stainless steel appliances in Cherry Creek School District? Of course not. But it will get you a 2 bed, 2 bath townhome with nearly 1,500 square feet in Cherry Creek School District. I’m serious – check out this listing. And if you’re more flexible about school districts, there are six other townhomes and condos under $280,000 active on my site right now.
Let Me Help You Get Into a Home
I’m happy to share information about the types of mortgages, downpayment assistance programs, credit repair services, and more…all so we can get you into a home. Just give me a call at 303-204-6494 and open the door to home ownership.