How Much House Can You (Really) Afford? The Good News Is That You Have Options.
How much house can you afford? Ahh, that is the million dollar question.
There are numerous articles, calculators, etc. available on the web that will give you an idea of what you can afford. The rule of thumb is 28% of your pre-tax income (that includes mortgage, HOA, Property taxes, insurance etc.) assuming your regular monthly debt obligations do not exceed 36%. Another option is to look at your current rent. Would you like your mortgage to be less than or greater than that number (going higher could mean a tax benefit)?
If this has you feeling discouraged, don’t be. Most people, especially San Franciscans, don’t know their true buying power because even though you need the to finances to support a purchase, knowing your options can really help you out.
1. Speak with a mortgage broker
Most home buyers will automatically speak with only their primary banking institution & request a loan. This has it’s advantages & disadvantages. But, how do you know if you’re getting the best deal? A mortgage broker, on the other hand, will help you shop around for the best rate & can also help you figure out how to actually get a bigger loan. You need to make sure you’re speaking with a credible institution & knowing the right realtor will help you do that.
2. Speak with your own bank
If you have already spoken with a mortgage broker, it’s still a good idea to go back to the institution you bank with. Having a competing offer provides a good opportunity for negotiation power with your current banker. For example, I have a client who is a Chase Private Client. Her bank was willing to give her a bigger loan at a good rate because her finances were solid and Chase wanted her to keep her money with them.
3. Speak with your employer
Employers have more benefits than you might think, especially in expensive cities. I know of multiple first time homebuyers in the medical field (or any other careers where the income potential is high, but have a lot of education debt like lawyers, etc.) whose employers provided down payment assistance to purchase their dream home. It is a way to for employers to stay competitive and keep from losing top talent.
4. Put More Money Down (If You Can)
This might seem obvious, and your lender will likely recommend it, but it’s still worth noting. Putting more money down means you can afford more house and possibly reduce your interest rate & monthly mortgage payments.
5. If you already have a home, leverage your homes value
It can be tricky & tight but some banks will allow you to leverage your homes potential sale value for a higher loan. Each lender is different, but basically the lender will approval a loan/home purchase with a contingency that the home buyers current home is sold within a specified number of days. This is helpful especially if you aren’t in a position to move out of your current home before you purchase your new home.
6. Don’t forget about family
This one is fairly obvious but if you have a parent/relative who can loan you some money to ease your monthly mortgage without having to worry about an interest rate or a payback timeline, this is worth considering.
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Need more home buying tips? See below!