Buying a house is the quintessential “American Dream”. But there’s a lot that goes into buying a house. Should you build a house? Are you handy enough to deal with a fixer-upper? Is it located in the city or the suburbs? All of these important questions play a role in determining the ultimate cost of the home. Oftentimes if you have good credit a bank can approve you for a lot more house than you can actually afford. So how do you know if a house is actually within your budget? Here are a few simple tips in determining whether or not you can afford the house you want to buy. 

Determine your total income

Unless you’re paying cash for a house you will probably be taking out a mortgage and making payments on the house. It sounds obvious but you can’t obviously know how much you can afford without first determining exactly how much you make. If you are a dual income family you need to add up both incomes for the entire month after taxes. This means all sources of income including: paychecks, child support, dividend income, rental income, etc. Be sure that every consistent source of income is listed. 

For Example if your income is:

Jack’s Paycheck 1 = $1,300

Jill’s Paycheck 1 = $1,300

Jack’s Paycheck 2 = $1,300

Jill’s Paycheck 1 = $1,300

Child Support = $700

TOTAL: $5,900

List and add up all your current monthly expenses minus your home expenses

List every expense such as: food, insurance, cable, charity, investing, etc. Once these are added together you will get a specific number. 

For example if your expenses are:

Savings =$600

Food = $600

Insurance = $625

Auto Payments = $600

Health Costs $350

Recreation = $225

Investments = $1400

TOTAL: $4,400

The reason why you don't need to add up current home expenses like utilities, property taxes, travel expenses and the likes is because that will obviously change once you relocate. 

Determine potential ownership costs

A good rule of thumb is to limit your housing payment to no more than 25% of your monthly take- home pay. This includes all: interest, property taxes, HOA fees, homeowner’s insurance and PMI if you don’t have a large enough down payment. A simple equation is TOTAL INCOME X 25% or in this case ($5,900x .25=$1,475). So this couple should not go over a $1,475 monthly payment. Once you have a pretty solid idea of where you want to live do your research and determine the property taxes in the area, the average utility costs as well as work commute. If you’re going to be commuting an extra 50 miles one way the price of gas and vehicle maintenance can affect your budget by thousands of dollars per year. Add up all your future home expenses such as mortgage payment, travel, average utilities and all of those should come under this determined number in which you should have the green light!

Plan for the future

People often get stuck in the moment. We tend to not plan ahead and when it comes to buying a home this is a bad idea. None of us know the future that lies ahead so it’s a good idea to leave yourself a little wiggle room If you plan on making changes in the future such as having children and taking into consideration child care costs or the yearly rise in property taxes. Make sure your budget has room to grow so maybe consider coming just under your determined number. This will help in the case of unexpected life events.

So can you afford that house?

Home ownership can be an absolutely wonderful thing but it can also be an experience from hell. Much of this is determined by our financial situations and planning ahead. It's no fun to live in a nice house but too broke to do anything else. This makes you house poor.  But after determining your total monthly household income as well as your total household expenses your total home payment including utilities, taxes, insurance, etc. based on the area you want to live should be no more than 25% of your total income. If your dream house fits within these parameters then by all means you have the green light to make an offer!