How Much Should I Spend on My Home?

There it is, right down that tree-lined avenue, the two-story house with that glorious pool and cobblestone walkway. It’s the perfect house, you can practically see yourself sprawling out on the lawn in your bathing suit now, and it’s -- half a million dollars? Is that normal for this area? Is that even affordable? And how much will that cost per month?

If you’re a first-time homebuyer, you may have no idea how much house you can actually afford. What’s expensive for some buyers may be totally doable for you (whereas that cobblestone dream home down the street may be more of a future goal than a practical starter home). There’s no quick formula to figuring out how much you should spend on your home, but we’ll give you the top X factors to consider so you can start honing in on your ideal price range.

Home Budget Factor #1: Down Payment

The higher your down payment, the more expensive your house can be. The down payment essentially discounts the cost of your home by reducing the amount you need to borrow. For example, if you’re looking at a $300,000 home and you have $100,000 saved as a down payment, you only have to finance $200,000.

Now, if your lender has pre-approved you for a $300,000 loan, you could technically shop for houses up to $400,000 with your down payment in hand.

In a contrasting example, let’s say you’re still pre-approved for a $300,000 loan, but you’ve only saved up $60,000 for a down payment. You’ll only be able to afford homes up to $360,000 -- and further, you’ll pay more interest over the life of your mortgage.

The rule of thumb? The higher your down payment, the better your financial situation overall.

Home Budget Factor #2: Your Location

Home affordability is definitely tied to location. In some places, $100,000 will buy you a nice three-bedroom home with a two-car garage -- while in other places (cough, cough, we’re looking at you, Silicon Valley) $100,000 may barely cover the down payment. If you’re like most people, your location is probably already decided for you, based on your job or other external factors, but if you have the freedom to move, consider the housing market in different locations before settling down if you want to get the most for your money.

Home Budget Factor #3: Your Credit

Your personal creditworthiness (and that of your spouse or partner) may determine how much you’re able to spend on a home. Though there are home loan products for all walks of life -- including those with no credit history or poor credit -- generally speaking, you’ll be able to afford more if your credit is in top shape.

Don’t know where you stand? Get your credit report for free from Transunion, Equifax, or Experian (access each of these from annualcreditreport.com). If you wish to know your credit score, you’ll have the option to purchase this information after obtaining your report from one of the three credit bureaus listed above.

Home Budget Factor #5: Your Financial Obligations

It’s widely accepted that you shouldn’t spend more than 30% of your monthly income on rent or a mortgage (and it’s even common practice in more expensive metros to spend 50% on housing). So, it would stand that if you and your partner earn $10,000 a month, you can afford around $3,000 a month for your mortgage, right?

Not always. The problem with this notion is the assumption that you don’t have other obligations like student loan debt, car payments, or other recurring expenses. When you’re trying to determine how much house you can afford, it’s smart to be on the conservative side. Try this: tally up all of your recurring monthly debts and expenses aside from your housing costs. Now, compare this with your monthly income -- how much is left over? This should serve as a good jumping-off point for determining how much house you can afford.

Home Budget Factor #6: Your Lifestyle

You’ll find article after article online about determining how much house you can afford based on your income and debt. But what you won’t find is this very important, overlooked question: what do you want your life to look like?

Really think about it. You may be cruising along right now in your new job, or picking out onesies for the baby on the way, but what will your life look like in five years? What happens if you want to change jobs? What if you have twins, or if someone gets sick and you’re inundated with medical bills? Your responsibilities may change, but your mortgage won’t -- it’ll cost the same each month -- or more, if you’ve opted for an adjustable-rate mortgage. We don’t bring this up to be a Debbie Downer, but only to suggest you exercise caution. Lots of people are homeowners, but that doesn’t mean it’s a decision to take lightly! If you want one-on-one counsel, don’t hesitate to hit us up at Home.loans. We’re here to help.