Zillow.com offers an affordability calculator which bases it’s calculations on a variety of factors, all of which you can adjust to suit your needs. But what if you don’t know what your needs are?
First, let me point you to the affordability calculator so you can open it up in a new tab, or another window. If you don’t know how to do that, just press CMD or CTRL on your keyboard before you click that link.
Now, what you’re looking at is a simple calculator that shows you how much house you can afford based on an assumed annual income of $65,000 and, thank you very much Zillow, an assumed down payment of only
The problem really isn’t Zillow’s problem. It’s the lending industry as a whole.
You’ll notice a link below the down payment field. It reads ‘Advanced.’ Click it.
Now what? What do all of these numbers mean? Why are they already filled out with assumed values?
All of these numbers are used to calculate the “You can afford a house up to” number. That number is what you use to start searching for a home.
The problem with these assumptions is that they may have no correlation to your actual financial circumstances, and may even reinforce “industry standards” about what your best case scenario should be. Don’t let the lending world educate you on financial wisdom. They want your money. So before you enter your figures into this calculator, follow a few basic rules of thumb to ensure long term financial success.
Rules of Thumb
Best case scenario is just that…best case. These are straight out of Dave Ramsey’s Financial Peace University teachings.
- Don’t buy a house until you’re debt free. Pour every penny you earn into paying off your debts before you take on a responsibility like owning a house. It’s best case scenario.
- Don’t put less than 20% down. If you buy a house with less than 20% down, you will pay an additional monthly fee, which isn’t cheap, for mortgage insurance, and you aren’t even the beneficiary of the insurance.
- Don’t commit to a monthly mortgage payment that exceeds 25% of your net take-home pay.
- Don’t commit to a 30 year mortgage. The cost of a 30-year mortgage over a 15-year is substantial.
- Never calculate by your monthly payment ability, because lenders will allow you to commit more than you should to the loan.
So What Numbers Should I Put Into the Calculator?
There are costs associated with buying and owning a house that you have not yet experienced as a renter. Beware of those before you buy more house than you actually can afford.
Here are some good numbers to start with:
- Annual Income: This should be TAKE HOME pay. Not Gross Income.
- Monthly Debts: As mentioned before, if you’re debt free, this number should be zero. Unfortunately, the calculator doesn’t take into account monthly expenses, like electricity, gas, water, trash, pet food, etc.
- Down Payment: How much do you have? You should have at least 20% of the price range you think you can afford. This is where it gets difficult to determine. Without knowing the price of the home, you won’t know what 20% is.
- Interest Rate: Leave it as is, or get a quote from your local loan officer.
- Loan Term: 180 (15-Years.)
- Include Taxes and Insurance: Yes.
- Property Tax: In Arizona, roughly 1-2% is typical. Err on the high side.
- Home Insurance: This is only something that your insurance company can give you. Leave it as the default amount.
- Include PMI: You won’t know this until you know if you’re putting less than 20% down.
- HOA Dues: If you already have your mind made up about the neighborhood, find out what the dues are and use that number. Otherwise, enter $50/month if you’re going with a single family detached home, or $200/month if you’re going with a townhome or condominium.
Now you have a number to work with. Stick with it. Remember, your lender is going to be able to qualify you for a whole lot more than you can actually afford. Don’t buy into it, because you’ll find yourself in a house that you thought you were going to love, and then you’ll end up with credit card debt to cover the various maintenance that wasn’t expected because all of your savings was used to close the deal. Keep a buffer of at least 3-6 months of reserves that will be there after you close the sale of your home.
Ownership is an awesome thing. Don’t let it become a burden. Buy the “best case scenario way.”