Establishing a first-home budget is no easy task, especially for newlyweds, and in many areas of the country rising house prices are making the task even harder. Over the last few decades, many properties, especially those on the east and west coasts of the United States, have increased at a rate which is much higher than the comparable increase in income.
In fact, while the average American household today has a per capita income of about $62,000 per year, the median home price is $300,000. This forces the majority of Americans to receive pre-approval via mortgage lenders. Below are some tips that will help you establish the right budget to buy your first home.
Follow The “Twenty Five Percent” Rule
Before you can establish a budget you must know how much house you can actually afford. One reason for the real estate crash in the early 2000s was people taking on mortgages they really couldn’t afford, with the encouragement of unscrupulous lenders. The twenty five percent rule dictates that the mortgage you take out should never be greater than twenty five percent of your monthly income.
In other words, an American who wants to purchase a $300,000 house should make a minimum of $75,000 per year, or $6,250 per month, as this would allow them to comfortably make the mortgage payments. This is a very simplified example however, as most Americans have other types of debt that must be considered.
Calculate Your Ratio of Debt To Income
Most lenders will also evaluate a borrower’s ratio of debt to income. If the number is higher than forty three percent, then the prospective buyer should be denied the loan. However, the FHA, or Federal Housing Authority states that some lenders will look past forty three percent depending on the circumstances.
Purchase A Home In A Fly Over State
Although the median price for a home in the U.S. is about $300,000 there are states where you can buy a house for much less than this. Many of these are “fly over states” like Nebraska, Kansas or states in the South such as Arkansas or Tennessee. In these places it is possible to find homes for well under $100,000, a figure which is all but impossible in coastal states such as California or New York. The only downside to such states however is that job opportunities and incomes will be lower, so a possible solution is to get a higher income job working in a coastal state and then save up to eventually buy a home and retire in a fly over state.
The Down Payment Is Important
Those who purchase a home with a down payment of twenty percent can bypass the PMI, or private mortgage insurance. Other factors which will influence the amount you’ll pay include the home’s size, the potential for appreciation and your individual credit score. Also consider how much you saved for the down payment; if you can put down twenty percent it might be better to go for a home that only requires ten percent since this will leave more money in your pocket while allowing you to cover the cost of closing.