How Much Should I Spend on a House? 4 Steps to Follow

When shopping for a mortgage, you’ll find that you’ll often get prequalified for a higher loan amount than you anticipated. But before you lock into a high payment, here are 4 steps to help you understand how much you should spend on a house. The post How Much Should I Spend on a House? 4 Steps to Follow appeared first on Redfin | Real Estate Tips for Home Buying, Selling & More.

How Much Should I Spend on a House? 4 Steps to Follow

Shopping for a mortgage, you might encounter lenders who pre-qualify you for a higher loan amount than you expected. Many lenders work with standard debt-to-income ratio calculations which don’t take into account other costs of home ownership. If you take the highest loan amount, you risk maxing out your available funds and becoming “house poor,” without liquidity.  Here are four steps to follow when deciding how much you should spend on a house.

Step 1: Understand what percentage of your income should go toward your mortgage 

Take a good look at your monthly income and expenses. This will help you understand how much you can spend on a house. Keep in mind that you’ll need to account for taxes, insurance, repairs and renovations, along with increased utility expenses. That sounds like a lot, but remember that some are upfront costs, some are recurring, and other costs only happen once in a while. The first step is understanding how much you can afford to spend on a mortgage.

Determine your debt to income ratio (DTI). One of the first financial factors a lender will review is your DTI. To determine your DTI, take your gross monthly income before taxes (not your take-home pay) and divide that by the total amount you pay in recurring monthly debt. This number is the percentage of income required to make debt payments each month. Be sure to include income and debt for everyone on the loan application. If your spouse, partner, or roommate is a party on the , their gross income and recurring debts also play a factor. Recurring debt can include: 

  • Student loans
  • Car loans
  • Credit cards
  • Bank or department store credit card
  • Personal line of credit with a bank or other financial institution
  • Personal loans from any source
  • Child support or alimony payment

Use the 28/36 rule to determine what you can afford. According to this rule, also used by lenders, most people can afford to spend as much as 28% of their gross monthly income on a mortgage and up to 36% on debt payments and still manage other typical recurring expenses. Some lenders may approve you for a mortgage if your finances fall outside this ratio, but they will likely charge extra fees and a higher interest rate to cover the increased risk, making your mortgage more costly. 

What’s a “comfortable” mortgage payment vs. an  “aggressive” one? Lenders rely on industry benchmarks and historical data to determine that a 25-33% DTI will allow borrowers to “comfortably” pay their mortgage and still save consistently for retirement, college, or a home repair fund. At the other end of the spectrum, lenders may still offer a loan to a borrower with a DTI between 33-40%. This DTI range becomes “aggressive” for lenders and puts them at higher risk. And it’s not much better for borrowers at this range. With a DTI of 33-40%, you would need to keep a close eye on all of your expenses at all times. It could be challenging for a borrower with a DTI between 43-50% to get a mortgage. At 50%, you’d be better off paying down your debt to improve your DTI.

With a DTI under 33%, you’ll qualify for better terms and interest rates because you represent a low risk of default. The better your DTI, the more confident lenders will be that you’ll stay on track with your payments and pay back the mortgage. As your DTI approaches the 50% rate, you’ll see less favorable interest rates and terms to cover the potential risk to the lender. 

Step 2: Know all your costs when buying a house

It’s not all about your home’s purchase price. To secure a loan, most lenders require some amount of downpayment. To finalize the purchase and paperwork, you will pay additional closing costs. Below are the common .

Your down payment is your “skin in the game.” It commits you to the mortgage with a significant upfront investment. Among the various loans available, you can find down payment requirements ranging from 3-20% of the home’s purchase price. Most experts recommend that you put as much money as you can into your down payment. Most conventional loans require 20% as a downpayment, however, sometimes it’s simply not possible to . To work with a down payment less than 20%, you’ll need to qualify for an FHA, VA, or USDA loan. 

A downpayment of 20% has two key benefits: 

  1. Your total loan will be for a lower amount, so you will owe less in both principal and interest, resulting in a lower monthly mortgage payment. Because you’ve put a significant amount of money down against the worth of the home, you could be saving tens of thousands of dollars in interest payments. As you ask yourself how much to spend on a house, be sure to factor in your down payment. . 
  2. When you put 20% down, you don’t pay for private mortgage insurance (PMI). Lenders require PMI to safeguard them if you default on the loan. Typically, once you have repaid 20% of your loan, you can ask the lender to remove the PMI payment. If you start with 20%, you avoid this extra payment altogether. 

Remember to factor in closing costs. These fees cover the title company’s work to ensure you have a . If the seller has unpaid debts (outside his or her mortgage) attached to the house, these liabilities could hold up the sale of the home. also cover the fees for appraisals, title insurance, attorney fees, and fees charged by the county to record the property transfer from the seller to the buyer. Expect to pay between 3-6% of the home’s total purchase price for closing costs. For example, purchasing a $200,000 home, you can expect to pay somewhere in the range of $6,000–$12,000 in closing costs. 

A classic brick house

Step 3: Project the costs of owning a home 

What does it cost to own and maintain a home? Your mortgage payment is the largest ongoing cost of homeownership. With most 30-year or 15-year conventional loans, homeowners will have a fixed-rate mortgage. This means a fixed monthly payment for the term of the loan. That amount will not change unless you refinance your terms with the lender. A longer mortgage term will often result in a lower monthly payment, and it will take longer to repay. A shorter mortgage term will involve a higher monthly payment and the home will be paid off sooner. 

For renters becoming homeowners, utility bills could bring sticker shock. As a homeowner, you can expect your utility bill to be almost four times higher than what you paid as a renter. Some renters even pay the landlord a flat fee for gas, electricity, sewer, and water. If you rent a house already, you may not see this as big of a change. As a homeowner, you pay for each service based on usage. For example, your water usage goes up when you take care of a lawn or garden. 

Homeowners need to pay property taxes and insurance. County property taxes commonly cover funding for local government, public schools, roads, emergency services, and libraries. Depending on where you live, your property tax rate will vary. You can look up property to include in your estimated homeownership costs.

Private Mortgage Insurance (PMI) pays the lender if you default on your mortgage. It applies to buyers whose down payment is less than 20%. You can typically expect your PMI payment to be between 0.5 – 1% of your loan amount per year. For example, on a $200,000 mortgage, your PMI payment would be $1,000 – $2,000 per year, or $83- $163 per month in addition to your mortgage. 

If you live in a community with a homeowners association (HOA), you will need to pay a monthly fee to the association. These fees typically cover property maintenance, amenities, and security. HOA fees range between $100-$1,000+ depending on the type of property and its location.

Your home will need repairs and renovations over time so you may want a home maintenance savings fund. A good rule of thumb is to save 1-4% of your home’s value for yearly maintenance and home improvements. Such as, for a $200,000 home, the homeowner should save between $2,000-$8,000 a year for maintenance or significant home improvements. 

Step 4: How much should you spend on a house? Calculate the “right” amount

A home affordability calculator estimates how much home you can afford. Four main factors are taken into consideration:

  1. Where you live
  2. Your annual income
  3. The amount you’ll apply as a down payment
  4. Monthly recurring debts and spending

Use the to get a sense of the right amount. To determine how much mortgage you can afford to pay each month, start by looking at how much you earn each year before taxes. Consider all your earnings for the year, which could include salary, wages, tips, commission, etc.

 Suppose you have a spouse or a partner with an income that will also contribute to the monthly mortgage. Make sure to include that in your gross annual income for your household. Then take your annual income and divide it by 12 to determine your monthly income.

Here are some examples of a comfortable or aggressive purchase price based on different incomes, debts, and down payment amounts.. These examples are not location-specific. Visit the where you can enter income, debt, location, and come up with a down payment that reflects your situation. Keep in mind you may need to pay PMI if your down payment is less than 20% of the purchase price, this will add an extra $83-$163 to your monthly mortgage payment. The examples below use a 4% interest rate for the estimated mortgage payment. 

IncomeDebt payment
Down payment
Comfortable purchase priceEstimated mortgage paymentAggressive purchase price
Estimated mortgage payment
$50,000$1,000$10,000$153,387$829$172,793$940
$75,000$1,000$15,000$252,910$1,374$285,072$1,558
$100,000$1,000$20,000$352,432$1,919$397,352$2,176
$150,000$1,000$25,000$547,074$3,008$617,478$3,410

Make sure you take some time to understand all costs associated with homeownership – and how they affect one another. Examine your DTI to determine if you can afford a loan at a good rate or be better served by paying off debt first. Then estimate your monthly mortgage payment along with other recurring costs to see how much you should be spending on a house.

Redfin does not provide financial advice. This article is for informational purposes only, and is not a substitute for professional advice from a financial advisor.

The post How Much Should I Spend on a House? 4 Steps to Follow appeared first on Redfin | Real Estate Tips for Home Buying, Selling & More.

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Thirty percent of UK commercial premises at risk of flooding

Climate risk adds a new dimension to growing commercial risk when it comes to flooding of commercial ©1999 - Present | Parkmatic Publications Ltd. All rights reserved | LandlordZONE® - Thirty percent of UK commercial premises at risk of flooding | LandlordZONE.

Thirty percent of UK commercial premises at risk of flooding

Climate risk adds a new dimension to growing commercial risk when it comes to flooding of commercial premises. More heavy summer downpours with flash floods are putting business operations at risk across the UK, with all the disruption that entails. These long-tail risks occurring in random locations are hard to predict, leaving many commercial operations unprotected.

According to Aviva data reported by webwire.com, July and August are now the most likely months for these random flood events to occur, and these are reflected in their claims for commercial premises flooding and the consequent business disruption.

Extreme weather events

Aviva maintains that almost one in three commercial properties in the UK are at some risk of flooding, according to their report. The evidence is backed by their claims from July 2021 which saw the highest number of commercial flood claims in one month, double their previous high.

Feed back from surveys of small and medium size enterprises (SMEs) show that over half (around 57%) believe that climate change is going to have some impact on their business over a 10 year period – extreme heat and flooding are their biggest concerns.

However, Aviva reckon that despite the risk, and concerns about it, few businesses, only around 20%, have actually put in place a continuity plan in case the worst should happen and their operations are brought to a standstill due to flooding.

Business advice and planning

Given its concerns, Aviva has launched a partnership with private advisory, Enterprise Nation, an organisation which provides a UK-wide network, a community of small businesses and business advisers that exist to give trusted business support. British businesses need this kind of support as they are being put at risk from extreme weather events. Their lack of awareness and preparedness for the risk is putting their survival at risk thinks Aviva.

A YouGov survey conducted for Aviva, which forms the basis of its ‘Building Future Communities’ report, found that 57% of SMEs believe climate change will impact their business in the next ten years, and a further 25% believe it will affect their livelihood within the next year. However, at lease 17% of the respondents said they were not concerned at all.

Further research by Aviva, looking into how flood risk areas and map data, shows that almost one in three (30%) commercial properties are at risk of some form of flooding. Aviva’s analysis of its claims records shows that there is an even more worrying picture, with its July 2021 claims its highest on record for commercial flood claims, double its previous high for January 2016.

Most recent data on weather shows that patterns are shifting with high risk flooding events no longer confined to winter months, but now prevalent in summer, with July and August most at risk.

The research shows that many businesses lack the information they need to ascertain the risk to their businesses, which is preventing them taking action such as planning flood mitigation strategies.

Aviva thinks its “Building Future Communities” report will help businesses understand the risks and meet the challenges they face from extreme weather. The report outlines key steps they can take now to minimise these risks.

Enterprise Nation and Aviva are to launch a ‘Plan it with Purpose’ free educational hub, which provides free online events, advice and educational resources to SMEs on a range of sustainability issues, including an educational series on climate resilience.

Nick Major, MD, commercial lines, General Insurance at Aviva, said;

“Unsurprisingly, over the past year businesses have been focused on dealing with the impacts of Covid and Brexit. However, as our data shows, climate change is already having devastating impacts here in the UK, and extreme weather is set to become more commonplace in future.

“Businesses frequently bear the brunt of this damage, but are often overlooked when it comes to prevention and protection. Planning regulations often prioritise homes over businesses, which leaves many SMEs exposed to flooding and other climate risks.

“SMEs account for over 99% of UK enterprises5, and they are vital to the wellbeing and recovery of local communities – particularly after extreme weather – offering support, jobs and stability. It’s crucial, therefore, that businesses receive more support with better insight into the risks they face to help them safeguard their livelihoods from climate change.

“In our ‘Building Future Communities’ report, we call for actions to be taken to ensure that SMEs are sufficiently protected from the impacts of extreme weather. By partnering with Enterprise Nation, we can help provide advice and support to SMEs, enabling them to become more climate-resilient.

“But we’re also calling for action to be taken across industries and Government, to ensure that businesses, from design to construction, are both sustainable and resilient to the changes that climate change will bring, and that they are built to the right standards, in the right places.”

“Climate change is already having devastating impacts here in the UK, and extreme weather is set to become more commonplace in future. Businesses frequently bear the brunt of this damage, but are often overlooked when it comes to prevention and protection.” – Nick Major, MD, commercial lines, General Insurance at Aviva

Excess heat is also a concern

While Aviva says that flood risk is the predominant concern, they believe that climate change will increasingly bring other risks including excess heat and storms. Their survey identifies that 42% of respondents are also worried about excess heat and 35% are worried about violent storms.

©1999 - Present | Parkmatic Publications Ltd. All rights reserved | LandlordZONE® - Thirty percent of UK commercial premises at risk of flooding | LandlordZONE.

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