Can I Afford to Buy a House? And how much should I spend?

Can I Afford to Buy a House?

When it comes to buying a house, the first question that comes to mind is, “How much house can I afford?”

The next question is, “How much cash on hand do I need for the closing transaction?”

The simple answer is it varies by lender, loan type, loan product and borrower. Some basic estimates can help a first time home buyer gauge if they are ready to enter the home buying market.

Home Purchase Price

The amount of money that a bank is willing to let you borrow is different from how much you can sustainably afford. A bank is only happy to oblige and let you borrow at the top end of your affordability.

But it is important to understand that a sustainable mortgage is usually about 2.5x your Gross Annual Income (GAI).

Example: GAI is $60,000

$60,000 x 2.5= $150,000

$60,000 x 3= $180,000

The affordability range would be between $150,000 and $180,000.

If you were hoping to buy more house than what your range allows, you would have to make up the difference with:

  • a larger down payment,
  • down payment assistance funds,
  • seller credits or lender credits.

Upfront Housing Costs

Below you will find a listing of upfront costs that will be paid for out of pocket:

  1. Earnest Money Deposit
    • Between 1%-1.5% of the purchase price of the house
    • Is paid when a purchase contract is signed
    • This deposit is credited back to you at closing
  2. Option Fee (optional)
    • Usually $10 per day for 10 days ($100)
    • Is paid when a purchase contract is signed
    • May or may not be credited back to you at closing
  3. Home Inspection
    • Between $300-$500
    • Is paid shortly after signing a purchase contract
    • Is not credited back to you
  4. Credit Report Fee
    • Between $25-$100
    • May be paid upfront or can be included in closing costs
  5. Appraisal Fee
    • Between $450-$600
    • May be paid upfront or can be included in closing costs

Down Payment

When it comes to how much down payment you will need, here are some percentages to refer to depending on the type of loan you are seeking. These minimum percentages refer to a percentage of the purchase price of the home you are looking to buy.

  • FHA Loan: 3.5% e.g. $5,250 down payment on a $150,000 house
  • Conventional Loan: 3%-5% e.g. $4,500 - $7,500 down payment on a $150,000 house
  • VA Loan: 0% e.g. no down payment required ($0)

Closing Costs

Closing costs are the sum of all the ancillary services that are necessary to give you a mortgage loan. They include things like:

  • processing and origination fees,
  • survey,
  • title work,
  • flood monitoring,
  • HOA dues,
  • pre-paid interest and property taxes,
  • government taxes and fees,
  • and so on.

Closing costs are not the same in every situation. They vary depending on the lender, title company, insurance company and the city and county where you are buying.

A good rule of thumb would be to prepare to pay between 3%-5% of the purchase price of the house in closing costs.

Sample Client

Let’s see how all these estimates add up with a sample client that is purchasing a $150,000 house.

Earnest Money Deposit: 1% $ 1,500

Option Fee: 10 days $ 100

Home Inspection: $ 400

Down Payment: 3.5% (FHA) $ 5,250

Closing Costs: 5% (including credit report and appraisal) $ 7,500

Total Out of Pocket Costs $14,750

Being financially prepared for home ownership can seem daunting when we are dealing with large figures like these. However, remember that there are seller credits, lender credits, down payment assistance funds, gift funds allowed and credits for taking the first time home buyer class available. You can learn how to shop for these discounts at our First Time Home-buyer Class.

If you have questions and have not yet taken a HUD Certified First- Time Homebuyer Class, call us at 713-864-9099, or sign up here.

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