How Do I Figure Out My Budget for Buying a House?

Most of us have watched HGTV shows where a couple has a certain budget for buying a house. They look at three houses that fit within that budget and choose the one they like best. While programs like this are considered reality TV, the budget that the buyers have is often not realistic. Sometimes they say they have $200,000 to buy a house plus another $100,000 for renovations, when in reality the producers are picking up part of the rehab bill. Or, the buyers on TV have millions to spend on a home on the West Coast — which is just not possible for the average viewer. Not only that, it’s a much different housing market here in the Midwest, where a modest budget can go much further. 

So what is a realistic budget for buying a house in the St. Louis area in real life? Well, it varies depending on a number of factors such as a buyer’s income, monthly expenses, and other things we’ll discuss below. The most important thing to keep in mind is that choosing a house within your budget can make homeownership much less stressful financially, and will allow you to truly enjoy your new home.

To figure out what you can spend on a house, you will first need to come up with several numbers.

Your Gross Income. The general rule of thumb is that an affordable mortgage amount should be no more than 2 to 2½ times gross annual income. So, someone making $100,000 is safest sticking to a house costing no more than $250,000. 

Money Saved for a Down Payment. The more you are able to put down on a house, the lower the total loan amount and thus, your monthly mortgage payment. For instance, 20% down on a $300,000 house will mean you’ll only have to take out a loan for $240,000. Having 20% of the purchase price upfront gets rid of private mortgage insurance (PMI). PMI is a separate monthly payment that will be added to your loan until you’ve paid off at least 20%. Buying a house without a down payment is possible for some, but will usually come with a higher interest rate. 

Current Monthly Expenses. Car payments, student loans, credit card bills, and any other monthly debt will all need to be deducted from the amount you can spend on a mortgage. You will also need to consider gas, gym memberships, average grocery bills, and entertainment expenses. Be honest with yourself. If you’re considering making financial adjustments like giving up Friday happy hours and quitting the gym to afford a bigger house, will you be happy doing so? It might be worth it to budget for buying a smaller house so you don’t have to change your lifestyle.  

The interest rate a lender gives you will affect your budget for buying a house. Lenders consider several things when determining interest rates: 

Credit. Credit scores typically indicate how reliable borrowers will be at making loan payments. In general, a higher credit score will result in a lower interest rate while bad credit will make your interest rate higher. Taking the time to work on your credit before house shopping can help increase your options. And by checking your credit score before applying for a loan, you can check for any errors in your credit report and report them to improve your chance of qualifying for better rates. 

Down Payment. Lenders reduce interest for buyers who have 20% to put down. As we discussed above, the less money you have upfront, the higher the interest rate. Many first-time homebuyers qualify for FHA loans which only require 3-5% down and have better interest rates than conventional loans, but additional fees or points may be added to an FHA loan. 

Loan Type. There are several mortgage loan categories such as conventional, FHA, USDA, and VA loans. Loan types have different eligibility requirements and interest rates can be significantly different depending on what loan type you qualify for. Talking to multiple lenders can help you better understand all of the options available to you. 

After knowing the above information, lenders will be able to offer advice on how much you should plan on spending on a house. Online mortgage calculators can give you a pretty accurate idea as well. 

FreddieMac lets you enter either your income or desired monthly payments to determine the value of a house you can afford. According to their calculator, someone with an annual salary of $100,000 with $500 in monthly expenses, a $50,000 down payment, and a 30-year loan at 6% interest can afford $348,000, which is a $2,300 monthly payment. 

Nerdwallet lets you plug in a house value and a percentage down, then reveals what your monthly payment will be. Your payment will include principal and interest, property taxes, and any Homeowners Association fees. To buy a $300,000 house, the expected monthly payment would be around $2,000. Of course, that number could definitely go up depending on the mortgage interest rate and the amount of property taxes in the city where you buy. 

SmartAsset delivers similar results to Nerdwallet, but also gives a recommendation for an annual income and savings amount needed in order to buy the house. Their calculator shows that for a $300,000 home purchase, a buyer should have a minimum income of $73,500 and a savings of at least $22,000 to cover a down payment, closing costs, and an emergency cash reserve. 

A key thing to keep in mind when budgeting for buying a house is that if something breaks, it’s on your dime to fix it. Whether it’s the furnace, water heater, garage door, or dishwasher, you will need some money in reserve to get those things functioning again. It’s best to buy a house below your maximum budget so you can afford unexpected expenses, and many lenders recommend that you have at least six months’ salary in reserve for “just in case.”

When you’re ready to take the exciting step of purchasing a home in Missouri or Illinois, a realtor at Berkshire Hathaway HomeServices Select Properties can point you toward properties that fit within your budget. We know which areas have properties available at your price point and will work to find the perfect match for you and your family. Contact us today to get started. 

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