When it comes to buying a house, the numbers get so big they can start to lose meaning. You may pass on $2 generic toothpaste in favor of the $2.25 brand-name, but zeros can really add up when it comes to a home. You can’t buy a $225,000 home on a $200,000 budget, even if you do stick with that bargain-brand toothpaste and amortize it over 30 years.
So how much house can you afford? What will that get you in your local market? Today, fortunately, it’s easier than ever to get those answers.
Doing the math
The first question used to be answered with scribbled calculations done while hunched over a dining room table. Things are much easier now. You can simply plug some numbers into an affordability calculator and voila! You’ll have your answer. Of course, you’ll need to know what numbers to enter. You’ll start with your gross annual income.
Then plug in any debt you currently owe, including car payments, student loan payments, existing mortgage payments that you will continue to owe, child support, alimony and minimum monthly payments on credit cards. You don’t need to worry about things like utilities and food – the calculator already assumes you’re going to need to eat and use lights and even buy clothes and entertainment. Finally, enter how much you’ve saved toward a down payment. The affordability calculator will tell you what you can afford to spend.
Your DTI
What you’re really looking at (and what lenders are going to be very interested in seeing) is your DTI or Debt to Income ratio. If you want to see how that figure shakes out for you, try the DTI calculator. Once you’re done you’ll know exactly what percentage of your income goes to paying off existing debt.
You can also check out the mortgage calculator to get an estimate of your monthly mortgage payment if you buy a home at that price. Then you can fiddle around with different interest rates and see what a 15-year loan would look like compared with a 30-year loan, or what spending a little less would look like in your monthly budget. The interest rate you’ll pay for your mortgage can have a big impact on your affordability. You can get real-time rate quotes from multiple lenders on Zillow by entering details such as your income, home purchase price, and credit score, to see exactly what interest rate you will qualify for. Having real numbers to look at will help make taking the leap a whole lot easier.
The marketplace
So now you know what you can afford, the next question is what will that buy in your market? The same payment that would buy you a mansion in Moline won’t get you a shack in San Francisco. But once again, you’re armed with an impressive array of research to help you. Zillow Research is like having your own staff of economists to help gather and decipher housing data from around the country. For instance, instead of driving around looking at asking prices or relying on the advice of friends and family who might have bought a house in a vastly different market, you can simply look up the local market reports for the area you are interested in.
In addition to the table covering the 35 largest metros in the U.S., you can see more detailed reports for locations in every state. Don’t see your city listed? Open the report for the city nearest you – you may find your exact town covered within the report. At the very least, you’ll get an idea of what’s happening nearby, which is usually a pretty good indication of what’s happening in your market. Of course, an even simpler way to get an idea of prices is to plug your city and state or ZIP code into the Zillow home search and see what’s available and at what price.
The other thing you’ll want to consider is what kind of market are you buying into. Is it a buyers market, a sellers market or neutral? You can get a pretty good idea by looking at the market reports for your area. Rising values and dropping inventory puts sellers in the driver’s seat. Stagnant or even lowering prices with increased inventory puts buyers in charge.
If it’s a sellers market, prepare yourself for a challenge. You may make several offers to buy a home before one is finally accepted. You may find yourself having to offer above asking price just to be considered. Don’t let a few disappointments pressure you into jumping into a home that doesn’t really fit your needs. At the same time, you aren’t going to have time to sleep on it if you find a home you love in a hot seller’s market. But with all your savvy market research and knowledge, that won’t be a problem.