Casually looking for a home can be a lot like window shopping – you take in what’s around and see what grabs your attention without necessarily focusing on price tags.
But when you start getting serious about buying a place, it’s time to double down on the money details. How much are you willing to spend? But also, what’s realistic for your financial situation? As you probably know, the house price is just one part of the picture; there are other expenses to add in, too, like a down payment and closing costs. And given that a home is usually a big purchase for most people, you’ll also want to think how that’ll impact your other financial goals.
We know, it’s a lot to wrap your head around! Luckily, we’ve outlined some calculations that can help you crunch the numbers and land on an informed decision.
To get a sense of what you can afford, you’ll want to do a little bit of math. (It’s not too complicated, we promise.)
First, tally up your gross monthly income. (Keeping an eye on what you net in a separate column could be helpful, since this is money that’s not committed to things like groceries and retirement contributions). This includes your pay from work, of course, and any investments and trusts, plus any profits from any properties sold before buying your home. If the plan is to buy your home as a couple – meaning you’ll both share ownership and be listed on the mortgage and on the deed – include your partner’s income, too.
Why is this number important? Well, it’s pretty straightforward. Lenders typically prefer that your total future housing payment – that is, your loan principal, loan interest, property taxes, homeowner’s insurance and (if applicable) private mortgage insurance – isn’t more than 28% of your gross income (before taxes).
Let’s look at an example. If your annual salary is $120,000, then your gross monthly income is $10,000 per month. Take 28% of this, and your baseline monthly housing payment should ideally stay under $2,800 per month.
Your targeted monthly housing payment is more than your mortgage. It includes your mortgage payment, property taxes and insurance.
Once you’ve calculated a target monthly housing payment, the next step is to look at your monthly expenses. This calculation will reveal another number lenders consider: your total debt-to-income ratio (DTI). It’s how much monthly debt you currently have compared to your income.
Say your total recurring debt is $3,000 monthly. (This can include expenses like student and personal loans, rent, credit card bills or car payments.)
Then, you’d divide that number by your gross monthly income to get your DTI. In our example, that’d work out to be: $3,000/$10,000 = 30%. This number falls under the general 43% guideline (yay!) and it shows lenders that you’re likely able to pay both your existing debts and also tack on a future housing payment.
If you're aiming for a down payment of 20%, look at your savings or chat with your advisor about where you could draw the money from. See if the amount you want to put down is in line with homes in the price range you're considering.
For example, if your target price range is $400,000 and you plan on a 20% down payment, then you'll want to make sure you’ll have $80,000 in hand by the time you’re ready to close on your home.
If some of the savings you'll need are wrapped up in longer-term savings vehicles, such as certificates of deposit (CDs), then plan your home buying timeline accordingly to avoid early withdrawal penalties.
But – see closing costs below – this is just a slice of the money you’ll want to have available, since there are other expenses you’ll need to cover.
Closing costs aren’t folded into the buying price, but they’ll be tacked on to your buying experience because they’re payments for services that make the sale possible.
Closing costs are fees that are charged by lenders, title agents, closing attorneys and other parties needed to complete a home sale and process a new mortgage loan. We go into more detail about these fees here, but you can expect closing costs to be 2% to 5% of the home’s purchase price. For a $400,000, home this means they could be anywhere from $8,000 to $20,000.
So you’ve considered the down payment, mortgage and closing costs – does that wrap up housing expenses? Almost! There are a few more costs to keep in mind:
A larger or more expensive home could mean higher utility bills and maintenance. (Flipside: If you’re downsizing, you may be paying less, in which case … where are you thinking of putting that extra cash?)
There are also the costs that come with moving in and moving out, such as:
As you’re scoping out potential homes, it’s a good idea to keep all these costs in mind now, so you’re not surprised later.
Having run through all these numbers, you’re now ready for the add-on financial question we hinted at in the opening – will this purchase, with all of these considerations, affect other priorities? These could include paying off student loans, funding educational 529 accounts, traveling or retirement. If so, it could be worth revisiting your target price and re-running the numbers.
This article is for informational purposes only and is not a substitute for individualized professional advice. Articles on this site were commissioned and approved by Marcus by Goldman Sachs®, but may not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA or any of their affiliates, subsidiaries or divisions.