A definitive guide to determining your affordable home price
Category Advice
Embarking on the journey to homeownership is an exciting but complex journey, and one of the critical aspects to master is determining your affordable home price because it involves more than just being able to afford the purchase price.
READ: Where first-time buyers can find affordable homes and 6 tips to consider when buying
This is according to Cobus Odendaal, CEO of Lew Geffen Sotheby's in Johannesburg and Randburg who says that calculating affordability is the linchpin of a successful and sustainable home-buying journey and this requires a comprehensive understanding your financial landscape, mortgage affordability, and the additional costs associated with buying a home.
"The key is to strike a balance between your dream home and financial prudence, ensuring a sustainable and fulfilling homeownership experience."
Odendaal says that by working through the following budgeting basics, buyers will be able to make informed decisions on their path to finding the perfect home:
Evaluate Your Finances:
Before you start browsing property listings, take a close look at your financial picture. Assess your monthly income, expenses, and existing debts. Understanding your financial health is the foundation of creating a realistic budget. Factor in not just your current expenses but also consider potential future changes, such as job transitions, family expansions, or unexpected expenses.
Calculate Your Debt-to-Income Ratio:
Lenders often use the debt-to-income ratio to assess your ability to manage monthly mortgage payments. Calculate this ratio by dividing your total monthly debt payments (including potential mortgage payments) by your gross monthly income. A lower debt-to-income ratio indicates a healthier financial profile and increases your chances of securing a favourable mortgage.
Establish a Realistic Budget:
Once you have a clear understanding of your finances, establish a realistic budget. A common guideline is to allocate no more than 28-31% of your gross monthly income to housing costs, including mortgage payments, property taxes, and home owner's insurance. This ensures that your housing expenses remain manageable within your overall financial framework.
Factor in a Deposit and Closing Costs:
Saving for a deposit is a crucial step in the home-buying process. While conventional wisdom often suggests a 20% down payment, some lenders do allow for smaller percentages. Calculate your potential down payment based on your budget and savings capacity. Additionally, associated costs like the conveyancing attorney and be prepared for all upfront expenses to avoid surprises.
Understand Mortgage Affordability:
Your mortgage affordability goes beyond the purchase price of the home. Lenders consider various factors, including your credit score, deposit and debt-to-income ratio. Use online mortgage calculators to estimate potential monthly payments based on different loan scenarios. This helps you gauge how different loan amounts and interest rates impact your budget.
Get Pre-Approved for a Mortgage:
A crucial step in determining your affordable home price is getting pre-approved for a mortgage. This process involves a lender assessing your financial situation and providing a conditional commitment for a loan. A pre-approval not only enhances your credibility as a buyer but also helps you understand the maximum loan amount you qualify for based on your financial profile and gets a head start on the paperwork.
Consider Your Lifestyle and Future Plans:
While budgeting for a home, it's essential to consider your lifestyle and long-term plans. Evaluate factors such as commuting costs, property maintenance, and potential changes in family dynamics. This holistic approach ensures that your home purchase aligns with your overall life goals and doesn't strain your budget in the long run.
Be Mindful of Additional Costs:
Beyond the purchase price and mortgage payments, homeownership comes with additional costs. Consider rates and taxes, homeowners association (HOA) fees, maintenance and repair expenses, building insurance and potential increases in utility bills. Factoring in these ongoing costs ensures that your budget remains sustainable over the long term.
Consult with Real Estate Professionals:
Don't hesitate to seek guidance from real estate professionals, including real estate agents and mortgage advisors. Experienced professionals can provide insights into local market conditions, assist in negotiations, and offer valuable advice on navigating the complexities of home buying. Their expertise can be instrumental in making informed decisions within your budget.
"Beyond the allure of dream homes and picturesque neighbourhoods, understanding your financial boundaries is paramount and calculating affordability is the foundation upon which your homeownership dreams can stand securely, ensuring a harmonious balance between aspirations and fiscal responsibility.
"Buying a home should be a positive and exciting experience and, by carefully evaluating your finances, establishing a realistic budget, and leveraging available resources, you can embark on your home-buying journey with confidence and seamlessly navigate the journey to home ownership," says Odendaal.
Read: First-time homebuyers' fears - how to overcome them
In an article published on 11 May 2023, Pam Naidu, Director of Sales and Marketing at Devmco Realty, shared some key learnings which every first-time buyer should know when deciding to purchase their dream home.
1. Location, location, location! Also known as the Three L's:
There are three micro locations that define the actual location of a property on a macro level. If the property you want to purchase is in an estate for example, you may want to find out what area of the estate it sits in and what that actual area provides, such as a good sea views, etc.
2. Financial stability is important:
Get your credit card payments and debts in order.
3. Budget:
Establish a realistic budget to determine your affordability. Create a budget and try to stick to it so that you can enjoy the process and not put yourself under too much pressure.
4. Find a trustworthy real estate agent:
This is the person that will assist in picking out your potential home and exploring your new neighborhood and is also responsible for scheduling tours and negotiating important contracts on your behalf. Ensure that this is someone you trust, to have your best interests at heart.
5. Get approved:
Get a pre-approval letter before you start shopping! This will help you have realistic expectations on what you can afford.
6. Be mindful of transfer and closing costs:
First time buyers usually tend not to factor these costs in, and it comes as a huge surprise at the end. Doing your homework is a very vital part of house hunting.
Becoming a first-time homeowner can be an overwhelming experience and requires careful consideration of several factors. With the expert advice from Devmco Realty, first-time home buyers can make an informed decision and successfully unlock the door to their dream home.
Author: Property24