sticker shock

Becoming a homeowner is an event that many of us look forward to. But all too often, when it’s all said and done, we suffer from belated sticker shock. Even though lenders have requirements regarding income and debts, we may still end up with more house than we can afford.

When buying a home, it’s crucial to consider our unique financial and life circumstances. Going with the amount that lenders tell you that you can afford is a mistake. These numbers may work as a general guideline, but sometimes they’re just too high.

Here’s a list of things to consider when deciding how much of a house you can afford.

How much debt are you in already? If you have outstanding car loans or credit card balances, this will affect how much you can afford to spend on a mortgage payment each month. As a general rule, your total debt should not be more than 36% of your income. But if you’re not comfortable with that figure, by all means go lower.

How much of a down payment can you afford? There are loans available that do not require a down payment, but it’s best to make one if at all possible. This will reduce the amount you have to borrow, hence reducing your monthly payment. And if you pay at least 20% down, you won’t be required to pay private mortgage insurance (PMI).

What will the taxes on your property amount to? You’ll have to keep your property taxes current to comply with the terms of your mortgage. In some cases, a lender will require you to pay into an escrow account each month to ensure that they are paid. Otherwise, you’ll have to budget for taxes on your own.

Don’t forget about homeowner’s insurance. This is also required by lenders to protect their interest in your property. You may also need more insurance than the lender requires to ensure that you have enough coverage.

Keep maintenance and repairs in mind. When you’re renting, these are your landlord’s responsibility. But when you’re a homeowner, it’s all up to you.

Are you expecting any changes in your income in the future? If you plan to start a family, you may have to deal with lost income during maternity leave. You’ll also have higher expenses with each new addition. This and other changes in your situation could leave you with less money to put toward mortgage payments.

What are interest rates like? When interest rates are high, the amount of home one can afford goes down. When they’re low, it goes up. If you’re on the borderline and interest rates are high, consider waiting until they drop before buying.

When becoming a homeowner, it’s easy to get carried away and spend more on a home than you can comfortably afford. But if you do, you’re setting yourself up for financial difficulties in the future. Knowing what you can afford to pay for housing each month, including expenses such as taxes, insurance and maintenance, will help avoid unpleasant surprises down the road.