Buying a home is the epitome of the American dream. While it’s easy to get caught up in the excitement of finding the right home, it’s still a major undertaking not to be taken lightly.
Before buying a home, you need to be realistic about exactly how much you can afford to avoid biting off more than you can handle. Make sure you’re ready financially by being honest with yourself and asking the tough questions, such as: how much house can I afford in San Diego?
Put simply, how much house you can afford in San Diego (or anywhere else for that matter) boils down to the size of the mortgage you qualify for. A lending institution decides how much debt you can manage after taking into account your income, monthly expenses, savings, and how much cash you have for the down payment. When you decide to purchase a home, you need to know your budget for the entire house-buying process and seek out the most affordable housing within your price range.
Calculate Your Debt-to-Income Ratio
How much house you can afford depends on the amount of the mortgage you can handle. A good place to start when trying to figure out how much you can manage is to calculate your debt-to-income ratio (DTI).
This calculation basically determines how much money you spend in comparison with your income. To calculate your DTI, expressed as a percentage, add all of your monthly debt payments and divide them by your monthly income before tax. Rent, car and student loan payments, child support, and personal loan payments are just some of the debts that need to be considered. However, you don’t need to include general living expenses, such as entertainment, transportation, and groceries.
Needless to say, a high DTI ratio makes a house purchase a risky affair. Even if you decide to take a leap of faith and pursue the purchase of a home, lenders might not be interested in giving a mortgage to someone with a questionable or borderline DTI. When this happens, the lender is simply trying to prevent the borrower from taking on more debt than they can handle. After your house is foreclosed, it’s unlikely you will recover the initial down payment and years of loan payments. The whole ordeal could be catastrophic to your financial situation for years to come.
Consider the Mortgage Terms and Interest Rates
Apart from mortgage repayments, you need to consider the mortgage terms and associated interest rates. The mortgage term refers to the time period the amount borrowed is repaid.
House buyers in San Diego usually have the option of a fifteen or thirty year term. You need to calculate if you’ll be able to consistently repay your mortgage for the stipulated period to avoid foreclosure. Most financial experts advise to have three months of mortgage payments available at any given time. Your income and monthly debts might be relatively stable, but you can’t rule out unforeseen circumstances such as medical expenses. Should these pop-up, you’ll still be able to stay on top of your payments if you have money stashed away on the side.
The interest rate on a mortgage also needs to be taken into account. Lenders determine these rates, which can be either fixed or adjustable, and the interest rate can significantly impact the repayment amount.
Do You Have a Down payment?
Buying a house should never be an impulsive decision. For most, it’s a long-term goal that people save for in order to have the down payment needed to buy a home. The amount required will differ from one lender to the next and could be as little as 3% of the purchase amount, depending on the circumstances. Having a down payment ready comes with a few advantages, such as lowering your interest rate and eliminating mortgage insurance.
Take Your Time
Buying a home isn’t a decision anyone should make on the spur of the moment. It’s important that the purchase be within your budget to ensure that you don’t default and end up in foreclosure. Consider your monthly expenses in comparison to your income, the availability of a down payment, mortgage terms, and interest rates.
In most cases, you must have a low DTI ratio to get the go-ahead from a lender. Having a down payment will work in your favor because it lowers the interest rate and monthly payments. Make sure you’ll be able to repay the monthly mortgage for the stipulated period after taking the interest into account.Even when you do everything right, sometimes a seller will back out of a home sale. If this happens, don’t be discouraged—the right house for you is still out there.