Understanding the Factors That Determine Home Affordability

Buying a home is a big deal. You’ve probably spent a lot of time thinking about whether or not you are ready, if it’s the right time, and will you get pre-approved. Furthermore, if you do qualify, how much home can you truly afford?

Well, once you get pre-approved, your mortgage broker or lender probably gave you a letter telling you the maximum amount a lender has qualified you for or your maximum monthly payment. That’s great, it’s a good place to start when setting your budget.  However, you have to keep in mind that buying a house isn’t just about the listed price for the property. There are other factors to consider that can have an impact on what a new home will actually cost you each month. Understanding what some of these factors are will help you choose a home that fits your needs and your budget, better.

Let’s talk about five factors of a property that can affect how much you can truly afford.

The Role of Property Tax Rate in Home Affordability

Where you choose to buy will likely affect how much you pay in taxes. Let’s say you find two homes listed for $200,000. You love them both but they are in different neighborhoods.

Before you decide on which one to buy you should ask about the property taxes. This can mean a big difference in the amount of your monthly mortgage payment. Sure, you may have been preapproved to buy a $200,000 home but maybe you are only comfortable with a monthly mortgage payment of $1,400.

After speaking with your mortgage broker about each property you find out that one of the properties has $2,400 in yearly taxes and the other has $4,000 in yearly taxes. On the surface, it doesn’t look like a big difference. But, your mortgage broker would tell you that your payment on house #1 would be $1,382.00 while house #2 is $1,515.00, which is over your $1,400 comfort zone.

Pay attention to the taxes on each property you visit. It’s also a good idea to look at the historical tax trends of each property. Remember taxes can change either up or down affecting your monthly payment for better or worse.

How Property Type Affects Your Home Affordability

What if you started your house hunt with the idea that you wanted a single-family home. While searching you discover a condo that is perfect. Let’s assume the condo you are interested in is the same price as a house that has piqued your interest too.

We already know that taxes can influence your mortgage payment but when it comes to condos there is more to consider. Condos or townhouses usually have homeowners association fees or HOA fees. Your lender will have to factor this into your ability to qualify. It’s also likely that the interest rate will be higher. Also, not all lenders have mortgage solutions that will work with condo properties or other property types like manufactured or mobile homes.

PRO TIP: If you are interested in buying condos, mobile homes, manufactured homes or properties that are non-warrantable, checking with a mortgage broker is your best option. They often have mortgage solutions that allow for these types of properties.

The Impact of Market Competitiveness on Home Affordability

Hot markets mean you might have to compete for a house. Be prepared to pay more for a house you really love. Bidding wars can drive the price of a house up quickly. Keep this in mind when you are making offers and check with your loan officer to make sure your offer on any given property keeps you with-in your target monthly payment zone.

If you are in a more expensive area, you may have to outbid your competition. This might mean you will need a jumbo loan. Jumbo loans are loans that are larger than the maximum loan limits set by Fannie and Freddie. They typically have higher interest rates, may require more money down, and you will need to have good credit to qualify. All of these factors affect how much you are ultimately going to pay for a new home.

How HOA Fees Influence Your Home Affordability

This subject has already been touched on but it’s worth re-mentioning. HOA fees are monthly fees that are often required in certain condo communities and single-family home neighborhoods. Home owner association fees help the neighborhoods or communities maintain the properties, make improvements or support community amenities like a pool, park or an events center.

HOA fees can vary drastically. They can be as small as $100/mo or as high as $700/mo (or higher). The fees are all based on what the HOA provides. This matters when buying a home for two reasons; 1) you will want to factor this fee into your monthly budget. Can you afford it? 2) Your loan officer will need to account the fees when calculating your debt-to-income ratio (DTI). DTI affects whether or not you can even qualify for the mortgage loan.

Utility And Maintenance

Buying a home is just the start. Once you’ve moved into your new home you will have to maintain the property. Smaller properties usually mean less yearly expenses, while larger ones will cost more.

Be sure you set aside some money in your budget for maintenance. If you are living in a single family home things to consider having are the appropriate tools for yard management like lawn mowers, snow blowers, bush trimmers and lawn edgers. You may also need gas to run these tools. These are all expenses to think about.

Repairs to homes are typical. If you are buying an older home, repairs may be needed more frequently than a newer one.  Things that can happen include a garage door breaking, gutters coming loose, missing shingles, or interior maintenance like fresh paint or replacing leaky faucets. This (and more) are all things that can happen at any given time but will cost money to fix. Be sure to have money set aside to properly care for your house.

Lastly, utilities are an important expense to remember. Large homes will cost more to cool in the summer, heat in the winter and likely use more water and electricity daily.

Staying within your budget can be a bit of a balancing act when buying a home. If you have financial questions about a home you would like to buy, talk to your mortgage lender. They can help you figure out a realistic cost and help keep you on budget with a house you can truly afford.

They can help you figure out a realistic cost and help keep you on budget with a house you can truly afford.

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