Can I Afford to Buy a New Home?

Posted on May 15, 2023 in Mortgage FAQ's

Are you thinking about buying a home? If the answer is “yes”, you probably have other questions. Can I afford to buy a new home? How much money do I need to buy a new home? What do I need to do?

A big investment is always scary. But you can erase those fears by learning what’s involved in making your dream happen.New Home Inc.wants you to start your new home search with the confidence of knowing what’s involved in taking the step to homeownership.

Am I ready to buy a home?

There are two things to consider when deciding if you’re ready to buy a home. 

Emotionally, are you ready for the commitment to taking on the responsibility of paying for the home? Not just the mortgage but the expenses that come with owning a home? Are you excited about tackling the tasks, like lawn care, repair, and the upkeep? Have you talked to other homeowners about what they like and don’t like about owning their homes? Do your homework so that you’re fully aware of what you’re getting into. Buyer’s Remorse happens when people make decisions without fully exploring the consequences.

Financially, are you secure enough to keep up with the cost of owning a home? Is your employment stable? One of the good things about buying a new home with a fixed rate mortgage is that your monthly payment stays the same throughout the term of the loan, while your income is likely to keep going up.

As you think about your financial readiness, let’s look at the cost of buying a new home.

How much home can I afford to buy?

The real determination in how much home you can afford starts with the amount of the monthly mortgage. Consider the last vehicle you purchased. You probably discussed with the salesperson how much you were prepared to pay monthly. Then, the loan was calculated to make that happen, even if it meant a longer term for the loan.

When you talk to a lender, you’ll look at your income, monthly expenses, and credit history, for starters. They’re trying to determine how much you can realistically afford to pay each month so you’re not straining to make the mortgage payment.

There’s a good rule of thumb that says you should keep your total housing payment to no more than 32% of your gross (before taxes) monthly income. The total housing payment includes the monthly mortgage, insurance, property taxes, private mortgage insurance, and HOA. Keep your TOTAL monthly payments (housing, car, credit cards, student loans) to no more than 40% for your gross monthly income.

So, if we look at the buyer who is making $90,000 a year, that comes to $7,500 per month. The housing costs should be no more than $2,400 and the total monthly debt should not exceed $3,000.

There are two major factors when determining “how much home I can afford to buy?” 

  1. Your credit history.The lender “pulls” a credit report, which means they make an inquiry to one of the top 3 credit reporting agencies—Experian,Transunion, andEquifax. The report shows your total credit score, which reflects how much debt you have, your payment history (on time and late), any debts sent to collection, and the total amount of credit you have available.  The score ranges from 300 to 850. With a score of 720 or higher, you’re in good shape. But you might also qualify for a mortgage with a score lower than 720, but you’ll probably pay a higher interest rate.

  2. Yourdebt-to-income (DTI) ratioshows how much you owe in relation to home much you earn. Let’s say you’re making $90,000 a year and your total debt is $25,000. Divide your debt by your income, so in this case, your DTI is 28%. Lenders are looking for borrowers with a DTI of 36% or less.

TIP: It’s a great idea to build your credit score and pay down debts to reduce your debt-to-income ratio. Doing both greatly improves your creditworthiness!

What is mortgage pre-approval?

The very first step to take when preparing to buy a new home is to get mortgage pre-approval. In a simple phone call with a professional lender, you can determine how much of a mortgage you’ll likely qualify for. The lender will want to know your salary (and require a recent pay stub), a copy of your last two bank statements (to see cash flow), and your social security number (in order to request your credit report).

Pre-approval is not the same as being approved for a mortgage, but it’s a strong indicator that you’ll qualify, as long as everything checks out. 

Once you have mortgage pre-approval, ask the lender to provide you with a letter that confirms the information. You can present this letter with an offer on a home, which shows the seller that you’re a serious shopper with the ability to buy.

How much do I need to buy a new home?

The purchase price of a home is the big picture when buying a new home. What do you need for cash on hand?

Down payment.You’ll need to have a down payment. A 20% down payment is wonderful, if you have it, but don’t let that number scare you. First-time homebuyers make anaverage of 6% to 7% down paymentwhen buying a home. You might qualify for a low-interest home loan, like theFederal Housing Administration (FHA), which offers a mortgage with 3.5% down payment. TheVeterans Administration (VA)has loans for zero down payment for qualified buyers. And there are conventional home loans requiring as little as 3% down payment. 

TIP: The higher your credit score, the lower your interest rate. Focus on improving your credit score to get the best rate possible!

Closing costs.When you close on your home—finalizing the purchase and signing the loan documents—you’ll need to come to the table prepared to pay additional fees:

  • Lender feesare commonly 1% to 2% of the total loan amount (purchase price minus down payment), and include loan underwriting, credit check, processing and application fees.

  • Prorated property taxesrepresent the amount of property taxes due from the day of purchase through the city’s or town’s tax year. Property taxes are usually paid annually, so if the current homeowner paid the taxes on November 30 and you’re buying the home ion April, you’ll repay the owner for the taxes already paid for April through November.

  • Homeowners insuranceis required when you purchase your home, but you may only need to show proof of insurance, not pay the entire premium; it varies by lender. 

  • Homeowners association (HOA) feeis applicable when you are moving into a community that has an HOA. The fee covers maintenance of common areas, including the entrance, gardens, trash removal, and any amenities (e.g., swimming pool, clubhouse).

  • Ahome inspectionis required by the lender to ensure that the property is in good condition, something that you, as the buyer, would certainly want to know, too!

  • Real estate attorney feeis paid to your attorney for handling the legal aspects involved in the purchase of the home.

  • Thetitle searchis conducted to verify that the property does not have any outstanding liens or pending lawsuits that could prevent the sale from going through. The title search checks deeds, county land records, federal and state tax records, bankruptcy court records, and divorce records.

The total of closing costs runs between 2% and 6% of the total loan amount. You can find out the costs in advance by asking the lender, attorney, insurance company, and home inspector what they normally charge.

TIP: Use thisClosing Cost Calculatorto determine what you can expect to pay for closing costs on a home.

Do I need private mortgage insurance?

Private mortgage insurance (PMI)protects the lender against potential losses that could happen when a borrower stops paying. A PMI is frequently required when you’re putting less than 20% as a down payment. The monthly payment is based on the amount you borrow.

The good news is, once you’ve reached 20% equity in the home, you can request to cancel the PMI. Check the agreement to determine when you’ll be eligible to cancel the insurance and what you’ll have to do to make that happen.

What are closing cost credits?

You might hear the term “closing cost credits”. Some homebuilders, lenders, and sellers offer to pay a portion of your closing costs. The incentive can reduce the amount of money you need to bring to closing or can sometimes be applied to the down payment. Closing cost credits can definitely help you when buying a new home, so be sure to ask about this opportunity.

What does total cost of ownership mean?

Now that you’ve learned how much it costs to buy a home, there’s one more number you need to understand. Buying a home isn’t necessarily the same as owning it. The totalcost of ownershipmeans how much it costs to maintain your home. If you’re buying a resale home, you might need to replace appliances, like the kitchen appliances, furnace, or water heater. Those costs factor into the total cost of ownership. Renovations also need to be accounted for in your costs.

In addition, look at utility costs. How much is the estimated annual electricity bill? A home that’s highly energy efficient could save you money, so factor the cost into your total cost of ownership. 

When you understand the total cost of ownership for a particular home, you avoid the risk of being house-poor, which means having spent so much to acquire the home that you have nothing left in your budget to make it even better.

TIP: When looking at a new construction home that’s energy efficient, ask your lender if the cost savings could qualify you for a higher loan amount.

So…are you ready to buy a new home?

What do you think? Is a new home in your near future? If you’re searching for new homes for sale in Raleigh and the Raleigh suburbs, New Home Inc. would like to show you brand new construction homes—single-family homes andtownhomes—in some great areas. We’re building “ “Future-Proof”  homes right now that demonstrate a thoughtful approach. We include features that some builders consider “upgrades”, while others haven’t even thought about including them!

When you’re weighing the total cost of ownership,buying a new construction homemakes sense. It also saves you from the burden of dealing with home repairs, because your new home is fully covered by a warranty.

Talk to usabout what you want in your new home, and letNew Home you make it happen affordably.