This was originally published on Monday, January 11, 2016, in the Pacific Daily News. Click here to subscribe to the PDN.
Buying the house of your dreams can sometimes be just that … a dream. But owning a house that lives up to your family’s needs, provides shelter and is a part of your life memories is very possible. The reality is what you can afford and what makes you financially comfortable.
Some experts say that your monthly home payments and other loan payments should not exceed 35 percent of your monthly income. Before you start looking at houses and shopping for a loan, determine how much you can afford. The hardest thing is to fall in love with a home and then find out you won’t be able to afford it. Knowing what you can afford first will make the process easier, since you will be looking at homes within your price range. Some people will go to a bank and get a pre-approved loan right away. Although banks are thorough with their financial research, you are the best person who knows exactly how your money is spent. The key is being honest with yourself when doing a budget.
Track your expenses for the next four months to the smallest details (entertainment, groceries, dining out, coffee, fuel, etc.). This may seem like an intimidating task, but it is an important step to knowing what you can afford. In other words, don’t just use what a bank or credit union uses in a mortgage pre-qualification worksheet as your guide to how much home you can afford. Don’t forget about all the other daily and monthly expenses. They add up quickly.
Add up all of your income that you earn after taxes. Include your current pay stub, your spouse’s, retirement check, Social Security payments, alimony, and any other income you receive that can be used towards your mortgage.
List all the recurring monthly expenses that you pay and add them up, such as the power bill, water, trash removal, insurances, phone, car payments, credit card payments and other loans. Don’t forget to include property taxes, tuition for schooling and medications. Subtract this amount from your income. Do not include your rent or other fees you pay for your home since you are determining how much you can afford.
Next, add up the other expenses such as fuel, groceries, entertainment, eating out, and buying clothing. If you have a hobby such as gaming, bingo diving, add those costs up as well. These expenses may fluctuate over the month depending on how much you use them. That is why tracking four months of your expenses is needed. It gives you a realistic snapshot of your spending habits. Subtract this total from the total you recently calculated in the last step.
What you have left is what you can afford for your monthly house payments. It is also wise to subtract an amount you want to put aside for home repairs and emergencies. When you own your home you can’t call the landlord to fix a problem. Those home repairs will be strictly your sole responsibility and out of pocket.
Now that you have an idea of what you can afford, you have worked on improving your credit score, and saved money for closing fees and that extra cushion, you can now go to a bank and inquire about a pre-approved loan. If your pre-approved loan is higher than what you calculated, stay on the safe side and look for a house less than what you are approved. The important thing is not to overextend yourself financially. You want the home to add value to you as an asset and not be a burden. The last thing you want to do is buy a home that could go into foreclosure, or worse, place you in bankruptcy.
Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at firstname.lastname@example.org and read past columns at the Money Matters blog at http://www.moneymattersguam.wordpress.com.