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How much can I afford, when buying a house in California?
That’s the million-dollar question (sometimes literally) home buyers ask when they’re in the early stages of making a purchase. And today, we’re going to tackle this question head on!
How Much House Can I Afford in California?
Most home buyers in California rely on mortgage financing when buying a house. In those cases, there are actually two sides to this question:
- How much of a monthly payment can I afford to make?
- How much of a mortgage loan can I get, with my income?
In this article, we will focus on the first of these questions. We’ll talk about monthly housing budgets, and how you can create one to determine your maximum monthly payment.
The main idea is this: Before you start talking to lenders, you should already have some idea of how much you can afford to spend on a California home purchase.
Here’s how to go about it:
1. Start by looking at your net monthly income.
To determine how much of a house you can afford to buy in California, based on your current salary, start with your net monthly income. This is your “take-home” pay, after taxes and other deductions have been withheld.
Write this number down on a piece of paper. It represents the total sum you have available each month. If you’re married, and both you and your spouse will contribute to the mortgage payments, write down your combined household income.
Just remember to focus on your net income, after taxes. Using your gross (or pre-tax) income won’t work for budgeting purposes.
2. Subtract non-housing monthly expenses and savings.
Next, you’ll want to subtract your monthly non-housing-related expenses from the amount identified in step #1. Non-housing expenses include car payments and insurance, credit card payments, health care costs, groceries, savings and retirement plan, etc.
Don’t forget to account for quality-of-life items, such as the occasional dinner out, movies, and the like. If those things are important to you, you’ll want to include them when creating a housing budget.
If you’re currently renting a home or apartment, you can leave that monthly expense off the list. Your rent payment will go away after you buy a house. With this process, you are focusing solely on your non-housing expenses.
Subtract these combined expenses from your net monthly income, and you’ll have some idea how much of a house payment you could afford in California. This is the maximum amount you could put toward a monthly mortgage payment.
But we’re not done yet. There are two steps remaining.
3. Use a mortgage calculator to break down home prices.
You’ve subtracted your recurring monthly expenses from your net monthly income. And you now have a sense of what you can put toward a house payment each month.
The next question is, how much of a house can you actually afford to buy? What’s the maximum sale price going to be, based on your monthly budgeting figure?
You can use an online mortgage calculator to answer this question — or at least to get a ballpark price range.
The idea here is to get a rough idea of how much house you can afford to buy, based on the monthly budget you identified in steps #1 and #2 above.
For starters, just plug in some hypothetical sale prices to see how much the monthly payments would be. It’s okay to use the default setting for taxes, mortgage rate, etc. You can always refine the calculation process later, once you know what those additional values will be. You’ll quickly learn what you can afford to buy — and what you can’t.
Later, when you apply for a mortgage loan, you’ll receive another important number. You’ll find out the maximum amount you’re able to borrow, based on your current financial situation.
These two numbers (your own budget, and the mortgage pre-approval amount) will help you narrow your housing search to a specific price range.
4. Don’t forget your emergency fund.
When setting your housing budget, you might want to leave some money left over each month for investing and/or savings. Financial experts also recommend keeping an “emergency fund” in the bank. This is money that could be used in the event of a job loss or other financial setback.
How much should you keep in reserve? That depends on who you ask.
Paul Golden, of the National Endowment for Financial Education, says three to six months worth of living expenses is a good place to start. He recommends an even larger emergency fund during a recession, or for times when the job market is weak.
Other experts recommend keeping more money in reserve. Mitchell D. Weiss, a finance professor at the University of Hartford, recommends keeping six to twelve months worth of expenses in your emergency-fund bank account.
Need a mortgage loan? Bridgepoint Funding serves borrowers all across the state of California. We offer a variety of loan products, including FHA, VA and conventional. Please contact us if you would like get pre-approved for a loan for house-hunting purposes!