Buying a home is one of the biggest investments one will ever make. Of course, it’s also a dream to be a homeowner, but before you begin searching for the right place, it’s important to determine if you can really afford it. Be aware that it’s not just the sale price of the house, but many other expenses, from closing costs and homeowner’s insurance to property taxes, maintenance, repairs and more.

The average loan size in January 2021 hit a record high of over $395,000. With a 2.250% 30 year fixed loan, assuming a 20% down payment, would result in a monthly mortgage payment between $1,208 and just over $1,300. You can figure out your own using a house payment calculator that will give you an idea as to how much you can afford but you’ll also want to take in all those other factors along with some others too. For example, your interest rate may be higher if you don’t have a good credit score.

Your Credit Score

As home loan lenders want to know how much of a risk they’re taking on, your credit score plays an important part in determining your interest rate and ultimately your monthly payment. If it’s too low, you may not qualify for a mortgage at all. As soon as you start considering a home purchase, you’ll want to check your credit score with all the major bureaus: Equifax, Transunion, and Experian. If you’ve missed any payments, have a high amount of debt and a low credit score (at a minimum it should be 680 but ideally over 740), before applying for a mortgage you’ll want to improve it first.

Debt-to-Income Ratio

Keep in mind that if you have a high amount of debt, not only does it lower your credit score but it limits the amount you can borrow. If it’s too high, you’re unlikely to qualify. The debt-to-income ratio compares your total monthly debt to your monthly income before taxes. Typically your housing expenses shouldn’t exceed 28 percent of your monthly income.

How Much Savings Do You Have?

You probably know that you need to have enough cash to make the down payment and pay closing costs, but lenders also expect you to have money saved beyond that so that you can cover the loan payments should something unexpected occur such as a job loss. Aim to have at least three months of savings that would be enough to cover expenses like your mortgage loan and all other monthly debts.

Total Up All Expenses When Determining if That Home Can Fit Within Your Budget

When working out your budget to determine how much home you can afford, be sure to total up everything involved in owning a property. That includes your mortgage payment, property taxes, homeowners’ insurance, repairs, maintenance, and utility bills. When touring homes, you can usually inquire about the average cost of the home’s utility bills such as electricity, gas, water, and garbage.

Consider Your Future

Even if you can afford that home now, can you afford it in the future? For example, if you were to get laid off, could you easily find another job that pays the same or more? Are you expecting any major additional expenses in the near future like having kids or buying a new car?

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