Buying a home is one of the American Dreams. It’s not only a financial investment, but also an investment into your life. One of the first questions you will probably have when you begin thinking about buying a home is: “How much home can I afford?” The answer to this question may be more complicated than you think, which is why careful planning is crucial to the home buying process in Charleston, SC. Here are six factors you should consider when determining what you can afford to spend on a home:
1. Your Income
The higher your income, the more you will be able to afford. You can get a very rough idea of how much you can afford to spend on a house by multiplying your annual gross income by 2.5. For example, if you make $40,000 annually before taxes, you can probably afford around $100,000, if you make about $60,000 annually before taxes, you can probably afford around $150,000. This doesn’t factor in mortgage rates or other expenses, so keep this in mind.
2. Your Housing Ratio
No matter how much money you make, it is not wise to put your entire paycheck towards your housing expenses. Most experts recommend that you spend around 30 percent of your income on housing costs at most. This includes not only your mortgage, but also your interest, insurance, taxes and PMI. Divide your annual income by twelve and multiply by .30 to figure out how large of a monthly payment you can afford.
3. Your Debt-to-Income Ratio
If a large portion of your paycheck is needed to pay down other debts, you will have less money left over for a house. Most experts recommend that your debt-to-income ratio should be no higher than 30 to 40 percent of your gross monthly income. In other words, if you make $40,000 a year, you should not spend more than $1,000 to $1,333 on debt repayment each month.
4. Your Down Payment
The larger your down payment is, the smaller the loan will be … but you have to come up with the money for the down payment first. The typical down payment amount is 20 percent, though it is possible to get a loan for only five, ten or even zero percent down. If you can save up a large down payment, you can afford a nicer house.
5. Your Lifestyle
Every person has different expectations and goals for what they can afford. If you spend a lot of money on the latest clothes, electronic gadgets and meals out, you will have less money left over to buy a house than someone who scrimps and saves wherever possible. There is nothing wrong with this, but it is a factor to consider.
6. Additional Factors
In addition to the amount of money you have to spend, factors such as your credit score, the current mortgage rates and your future plans can affect your ability to afford a mortgage as well. Plus, you should factor in expenses such as home inspections, association fees and moving expenses, which can add up quickly.
Buying a Home in Charleston, SC
Whether you want to buy a home because it is an investment, because it is your dream, or because it is a wise financial decision, it is important to make sure that the Charleston, South Carolina home you choose is one you can afford.