Time to crunch the numbers and get your head around a fixed home-buying budget you can stick to. You always need a budget when buying property. This is likely going to be the most expensive thing you ever buy, and going in blind can make this mountain so much harder to climb. Affordability is everything, so in this post, we wanna try and help you understand exactly how you’re supposed to work out an appropriate home-buying budget. The first step is:
The numbers game
The internet has completely changed the way people approach modern home-buying. You can now find loads of affordability calculators online that will help identify your total budget for you. These calculators will ask you for details on your current financial circumstances, most will require the following information:
Your gross annual income
This is the amount of money you earn from all sources before taxation.
All outstanding debts
This is money that you owe to others. These can include credit card payments, car payments, student loans, and any other outstanding amounts that you currently owe.
Your down payment amount
This is the amount of money you have saved to this point and will use as your lump sum deposit for the house. All mortgages require a down payment as a sign of your commitment to the investment. No money down options might be available but expect to pay higher rates and unfavourable terms.
Using this information, the calculator will chew the numbers and provide you with a suitable budget. Usually, it’s in the form of a maximum spend amount. You’ll want to keep this number as the backbone of your home-hunt, as attempting to buy a home above your recommended affordable budget is going to come with significant risks.
Understanding your DTI
Your DTI is your Debt to Income ratio. It’s the key aspect that lenders look at when considering your circumstances. There are a wealth of DTI calculators online if you want to check yours out for yourself. This ratio is used to asses how much of your income is being paid towards your debts and plays a crucial role in determining the type of mortgage you’ll be offered.
Another tool that will prove useful and can be found very easily online is a mortgage calculator. With all the details mentioned above, you can throw your finances into the calculator and get a breakdown of the interest rate you’d receive as well as the payments you’ll be seeing every month.
Once you’ve tried it, you can then change up the numbers to see how the results adapt. Compare longer-term loans to shorter ones, lower-priced houses to higher, and have a play until you have a good grip on how the calculations would work for you. The idea is to find the right arrangement that works for you perfectly and having realistic numbers to hand can go a long way in helping you pin down what you can afford, and what you can't.
It’s all very well knowing how the finances look, but it’s also essential to translate your budget over to real life listings in the current market. You’ll need a good understanding of what your current affordability will get you if you want to search and find appropriate options effectively.
Housing prices can differentiate wildly from area to area, as there are so many factors determining the value of a particular property. Throw your geographical preferences into a property search and see what the prices are like in your first choice neighbourhoods.
Buyers and seller's markets
This is a term you might have heard before and will almost certainly come across numerous times over the course of your hunt. A property is considered within a buyer's market if it’s located in an area where local real estate prices are stagnant or depreciating. You’ll notice that in these areas the amount of property you get for your money is likely to be far higher. In such environments, the buyer has the “edge”, as a property is generally harder to sell in these circumstances.
Seller's markets are the opposite. In a seller's market, the values of surrounding properties are rising and the value for money is decreasing. Property is in high demand here, which puts sellers in the driving seat. In these environments you need expect the hunt to be far more cutthroat and challenging. Offers below asking price are likely to be ignored as hot property always attracts escalating bids. Just imagine every listing you look at is being chased by an ever increasing mountain of serious buyers because that’s pretty much exactly what's happening!