Meet a few first-time home buyers
Let's break this down and make it easier to understand with a few scenarios of first-time home buyers so you can begin to see how to make these calculations work for you.
Sam is a young professional who graduated college several years ago. He's been paying down his student loans, saving up for a small down payment and feels he's ready to stop renting and buy his first home. He's also saved up $5,000 and put it into an emergency fund to handle unexpected expenses and home maintenance and repair costs. Here's how Sam stacks up:
- Pretax Income: $45,000 per year
- Debt: $400/month ($25,000 in student loans and credit card debt)
- Down Payment: $4,000
If Sam wanted to keep his total house payment to 25% or less of his pretax income, he'd be able to afford a $75,900 house. If he went up to 36%, he could afford a house worth $129,800.
Despite the long hours, Lisa enjoys her position at the law firm. She's been making a good income for several years now and is ready to buy. Here are her numbers:
- Pretax Income: $180,000 per year
- Debt: $700/month ($40,000 in student and car loan debt)
- Down Payment: $15,000
Lisa can afford a $415,600 house and keep her total house payment at 25% of her pretax income or push it to 36% with a $636,200 home.
Growin' Gary and Gwen
Gary and Gwen are starting a family, and they're ready to buy their first home. They've worked hard to pay off their student loans and credit card debt. Here's what they can afford:
- Pretax Income: $86,000 per year
- Debt: $300/month ($10,000 left on their car loan)
- Down Payment: $7,500
This young family can afford a $203,600 home and keep their total house payment at 25% or move into a $309,000 home and keep their payment at 36%.
Finding the home that's right for you
Income, debt, and down payment are the three primary factors when figuring out how much home you can afford. However, the interest rate on your mortgage can make a big difference too.
Put yourself in the best situation possible by being honest about what you can afford, not trying to buy more than you are comfortable with, and selecting a trustworthy realtor to show you houses in your price range.