Owning a home involves much more than just paying the mortgage payment.  Insurance and taxes are two regular costs that a homeowner will be paying on a yearly basis as part of owning a home.  More than just those payments homeowners need to save money or have enough money to cover home repairs.  Letting home repairs go without being fixed is a sure-fire way to disaster as some repairs if left untouched can result in the home becoming unlivable.  This article looks at the various aspects home buyers need to consider budget wise, when trying to determine home affordability.

Pre-Approval Amount Vs. Monthly Payment

A pre-approval amount gives buyers a general idea of how much home they can purchase considering their income, debts and credit score.  All pre-approval amounts are not equal as additional factors can come into play when an actual home is found.  Things like Homeowners Association (HOA) Fees, property taxes and insurance.  

The pre-approval amount does take into consideration property taxes and insurance at a general level.  The challenge that can arise is homes priced the same can have property taxes and homeowners’ insurance amount that are different based on their location.  A home located in a higher property tax area will have a higher property tax compared to another home which is in a low property tax area and will impact the home affordability calculations.  Homeowners insurance as well can vary not only by location differences but even a particular home if it had more claims in the past compared to a home right next door to it can be priced higher for the insurance premium.

The HOA fee can impact home affordability as well.  For example, an HOA fee of $350 per year does not add much overall to the cost of owning the home.  On the other hand, a fee of $350 per month is $4200 for the year and can change the affordability equation quite readily.  Some condominiums and homes in an HOA with many amenities (features like community pools, trails, parks etc.) can have fees that are that high and higher.

Ultimately it is the monthly payment that needs to be looked at in comparison to one’s budget which includes looking at current income and debt payments.  So, with the final pre-approval amount the monthly payment can change based on the actual home that is found to be desirable for the home buyer.  The home buyer should be looking at the monthly payment provided upon receiving the initial pre-approval letter and then asking for an updated monthly payment number once an actual home is chosen and the final tax and homeowners insurance numbers are available.  The monthly payment becomes a more important number to look at in order to determine home affordability.

The Down Payment Can Make a Difference

How much a home buyer can afford is also dependent on how much the buyer is putting down.  There are some loan programs (VA and USDA mortgage) which allow for zero down payment, but the less put down the greater the monthly payment will be.  Saving more money prior to buying a home to use for the down payment can make a big difference on the monthly payment.  The best mortgage interest rates come when one is putting 20% or more down on the typical conventional mortgage. Putting less than 20% down on a conventional mortgage means paying Private Mortgage Insurance (PMI) which is additional money paid on the mortgage that does not count towards the principal or interest portion of the payment.

Owning a Home is More than Monthly Payment

Many home buyers look at just the monthly payment and believe even if they are stretching for that they can still buy the home and be ok.  Unfortunately for them, there is a financial term called being “house poor”.  What that means is that a particular homeowner stretched their budget to buy a particular home and left little room for paying for other things.  This can happen when a married couple buy a home based on both of their incomes and one loses their job, decides to take a lower paying job or not work at all to be at home with the kids.  It can also happen when a single homeowner loses their job and must take one at lower pay.  Whatever the reason, the current situation that results is that the homeowners are paying more for their mortgage payment (principal, interest, taxes and insurance) than their budget can handle resulting in them being short on cash for other expenses.

The house poor situation can really become a problem where house maintenance must be deferred because the homeowner cannot afford to fix things.  Minor things like a drafty door or a dripping faucet are easy to ignore and don’t waste too much money up front.  But that minor plumbing leak where water is dripping behind a wall or the roof leak which happens only during heavy rains can lead to huge repair costs if left untreated.  Situations such as those can lead to wood rot, mold, structural damage and more that causes the home to be unlivable.  Damage caused by deferred maintenance is not something usually covered under homeowners’ insurance as well which can result in large financial losses if the homeowner has to move out and find another place to live.

Instead, homeowners need to budget in an emergency fund that can be built up over time depending on the condition of the home before making the purchase.  A new construction home with everything new inside is less likely to have any major expensive issues, so a smaller amount can be set aside for an emergency fund.  An older home with an older furnace, older roof or something else to keep an eye on, the homeowner should be setting aside a much larger amount as an emergency fund.  The savings for the emergency fund should be considered as part of the home affordability calculations to truly be on the safe side.

Your Lender Can Help

The mortgage lender’s job is not just to quote an interest rate, provide a preapproval amount and monthly payment.  They can and should be talking to you as a home buyer about the entire mortgage process.  Explaining the credit pull process, underwriting, as well as closing.  The mortgage lender should be providing the home buyers with tools to help them understand how much home they can afford.  That can include things like access to financial calculators and budgeting tools and more.  Owning a home is a long-term financial commitment and working with the right mortgage professional who can guide you through the process is important.

Final Thoughts

Owning a home is more than just the monthly mortgage payment and the monthly mortgage payment can vary based on initial estimates.  Home buyers need to have a firm grasp of how much their monthly budget can handle when shopping for homes.  By working with professional real estate agents and mortgage lenders home buyers can get some great results.