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Buying a home may be one of the most expensive purchases you’ll make so it’s important to carefully consider your budget before setting out on the search for your dream home. You’ll want to have enough leeway so you can cover unexpected expenses, save for your retirement, and live the life you want.
You might consider using a mortgage calculator to get an idea of what you can afford to spend on a home. Lenders often use a method, called the 28/36 rule, to estimate how much of a mortgage you can realistically afford.
According to this rule, 28% of your gross monthly income should go to housing, which includes your housing payment of principle, interest, taxes, hazard and mortgage insurances and any homeowner’s association fees. While 43% is considered the maximum debt-to-income (DTI) ratio for a qualified mortgage, the 28/36 rule recommends capping your DTI at 36%. The 36% would be your total financial obligations, including housing expenses and any other debt you may owe, such as outstanding credit card balances or loans.
Be prepared for some extra expenses when you buy a home. You will have to pay some fees up front, such as if you choose to have a professional home inspection. Others can be rolled into your mortgage, which will affect your monthly payment. When you apply for a mortgage, your lender must give you a document called a Loan Estimate. It will list many of the fees that are required at closing, such as:
Homeowners insurance. This required expense protects you against personal liability and hazards, such as fire. Your costs will depend on the value of your home and its location.
Title insurance. You’re typically required to purchase lender’s title insurance, which protects the lender in case there’s a problem with the home’s title. It may be rolled into your closing costs or it can be included in the loan.
Private mortgage insurance. If your down payment is less than 20%, you may be required to purchase private mortgage insurance, or PMI. The insurance protects the lender if the borrower defaults on the mortgage.
Home appraisal and survey fees. An appraisal is an upfront fee that’s needed to establish the fair market value of the home. It’s based on comparable home sales in your area, and your lender needs it to ensure the house is worth the amount you’re asking to borrow. A survey is required to show the legal boundaries of the property.
Property taxes/association fees. You may have to pay a prorated portion of property taxes or homeowners association fees.
An experienced mortgage specialist can help you understand the true costs of homeownership so you can be a financially prepared buyer.
Please note, membership is required to accept a DCU mortgage.
This article is for informational purposes only. It is not intended to serve as legal, financial, investment or tax advice or indicate that a specific DCU product or service is right for you. For specific advice about your unique circumstances, you may wish to consult a financial professional.