Buyer Beware: The List Price Has Little to Do with What You Can Afford

If you are financing any part of your home purchase, then the overall purchase price of the home is only a small part of it’s affordability. If you’re like almost all buyers, you start off your search by saying something like, “We are going to buy a home for $900,000” — and then you head out to open houses in that price range.

I would suggest that unless you are buying with cash, you are setting yourself up for disappointment under the above scenario.

Here are the steps I recommend for determining a comfortable price range:

FIRST, decide what you want to pay PER MONTH for your housing expenses. These include mortgage payments, property taxes, insurance and any condo or home owner association fees.

Why decide before talking to lenders or starting your search? It’s simple.

Most lenders will approve you for more than you want to spend. This often comes as a surprise, since most people feel like they won’t be approved for enough.
Start the conversation with your lender not by asking them what you are approved to buy, but rather telling them what you feel comfortable paying per month for your new home

The lender can then work backward to determine the correlating sale price and let you know if you would be approved for that amount.

If you plan to buy a condo or anything else with a monthly association fee, the correlating purchase price will be lower since you need to include this amount.

Not sure how to determine an affordable monthly payment?

Conservative advice is to spend about 30 percent of your income on housing. Look at your monthly budget so you can compare future home expenses to your current housing expenses. Again, focus on your monthly mortgage payment rather than fixating on that nebulous asking price.

The other big piece of the affordability puzzle is the amount of cash you can allocate to the transaction – you will need some for closing costs (usually about 1.5-2% of the total transaction) and a down payment.

Don’t worry so much about putting 20% down. There is a very traditional mindset that says you must put 20% down in order to avoid mortgage insurance. You may actually be better off putting less down, depending on the scenario. That’s why it’s important to have a knowledgeable lender and real estate agent working with you.