Before you even start looking to buy a home you should first find out if you can afford a home. Yes, for many, homeownership is still the ultimate dream but it is not for everybody. Sometimes you have to put your dream on hold until you are able to fulfill this dream.
To find out if you can afford purchasing a home go through the following steps first
- 1. Find out what the total household income is
Get all of your check together from the last 3 month, total them and divide them by 3. This will give you an average monthly income. In this example I am using a married couple that is now wanting to fulfill their dream of buying a house.
She is getting paid once a month a set salary of $1200 a month and he is getting a weekly paycheck from his construction job where he only works during the normal construction season in this case only April until October.
| She | $1200 | He | $489 |
| $1200 | $475 | ||
| $1200 | $456 | ||
| ————– | $560 | ||
| $3600 / 3 = $1200 | $843 | ||
| $765 | |||
| $467 | |||
| $432 | |||
| $678 | |||
| $567 | |||
| $498 | |||
| $578 | |||
| ——— | |||
| $6808 / 3 = $2669 |
As you can see the total average monthly household income is
$1200 = $2669 = $3869
2. Now it is time for you to examine your monthly expenses
Here is where you need to be honest with yourself and in my example this family needs to also put money back for the time where the husband, in this case the main bread winner, whose job is pending on the construction season and the weekly pay might not be the same due to weather or other construction related items. Every budget is different. Doing this step will give you a huge inside where your money is going and maybe you will discover you have at the end of the moth some moth left but no money.
This budget is based on him working 7 months and she works 12 month of the year.
Savings for off months= $1112
Rent = $400
Utilities = $300
Food = $300
Clothing = $100
Transportation/gas/repair/insurance= $400
Medical = $100
Personal = $300
Entertainment = $200
Retirement Savings = $530
Charitable giving = $120
Their current total budget is $3862 this includes are retirement savings account of $530.
In this case the couple also has a separate savings account for the off months where he is not working and regular monthly savings that needs to be $1112 a month. That is being used for the off months where he is not working. November to March in his area.
3. Now it is time to calculate the price of homeownership
Many of us cannot afford to pay cash for our dream house and need to take out a mortgage. The ball park figure I use in my office is that the mortgage payment that includes taxes and insurance should not be more than 23% to 28 % of the total annual household income.
Her monthly income is: $1200
His adjusted monthly income is: $2669 x 7 = $18,683 / 12 = $1557
Total adjusted monthly income = $2757
House payment with taxes and insurance should be between $643 and 772, which is between 23 and 28% of their total monthly adjusted household income. Remember, this does include taxes and insurance.
In their budget they need to make room for insurance, taxes but also repairs. They already have a section for rent that now will be changed to mortgage In this example I will take $78 a month for insurance, $80 in monthly taxes l and $100 for repairs leaving a house payment without taxes and insurance of $385 and $514 Because he only works 7 out of the 12 months I used the adjusted monthly income to run the mortgage calculations.
Here is the adjusted budget and I used the higher mortgage payment in this case
Savings for off months= $1112
Rent = $514
Taxes = 78
Insurance = 80
Utilities = $300
Food = $300
Clothing = $80
Transportation/gas/repair/insurance= $450
Medical = $50
Personal = $50
Entertainment = $100
Retirement Savings = $530
Charitable giving = $120
As you can see this couple had to make some adjustments to their budget to be able to afford the home and to be able to still save for retirement and not to go over budget during his off months during the year.
When you are looking to buy a home now or in the near future and you are looking for some guidance contact the Settles Team. We are more than happy to answer any question you may have.