How to Decide Whether You Can Afford a House

How to Decide Whether You Can Afford a House

Your current income and debt can help you decide how much you have available to spend on a house.
People who wish to buy a new home, find it very difficult to analyze how much money they should spend on it. Real estate investments are considered to be extremely effective in the long term and are less volatile than those made in the stock market. However, buying property at the right location and at the right price is essential to earn substantial profits. At the same time, you should keep an eye on how much you require to spend, to buy a proper house.

The most common mistake, which most people commit, is that they stretch their finances too much to buy homes. This naturally increases the burden of monthly installments and causes credit crunch for these people. If you end up paying most of your salary as monthly installments, to banks and financial institutions, then you will have very less cash left with you and this can be a big problem in times of emergencies.

The home affordability rule of thumb has helped many people realize their buying potential and take correct decisions. The rule of thumb actually suggests that you take a home loan which is two and a half to five times of your total annual income.

Deciding How Much to Spend on a House

Deciding how much to spend on a real estate property is always a tough decision. You see a property and you like it so much that you are willing to pay thousands of dollars more for it.

However, you also need money for other purposes in life, such as education, entertainment, general monthly living expenses, and savings. Hence, many financial advisers advise that the debt-to-income ratio should not be in excess of thirty six percent for all home buyers.

Apart from this, you should have at least six months worth of salary in cash, in your savings bank account. This cash, along with the interest you earn on it, will be very useful to deal with the sudden expenses which might emerge in the course of life. All those wishing to buy a house, should also have some smart investments in gold, mutual funds, and saving schemes, to ensure good liquidity whenever necessary.

Your choice of home will depend on your yearly income. If the income is high, naturally, your purchasing power would be more and hence, you would be in a position to buy an expensive home. You will have to compromise on your home price, if your income is fluctuating, or not constant. You also need to take into account, the existing loans you have taken and how much interest you are paying on them.

The tenure of these loans should also be taken into consideration before you apply for a home loan, as these loans are of long periods. So, your car loans, personal, and credit card loans should be taken into account, before you opt for a home loan. Ideally, the home loan amount should not be more than five times your yearly income.

The following items will have to be treated as expenses while deciding how much loan you can avail:
  • Investments
  • Real estate taxes
  • Alimony paid (if applicable)
  • Car payment
  • Credit card payment
  • Other debts
  • Wages paid
  • Insurance paid
While deciding to buy a house, you need to consider the rate of interest being charged by your lender, and the period of the loan. After considering all these factors, you will be able to decide how much money you can afford to spend on your dream home. Ergo, follow these instructions for a secure future.