How Much House Can You Afford Based on Your Salary?

Other Considerations For Determining Your Housing Budget

Thus far, we’ve looked at standard industry guidance on calculating a budget for buying a home. But there are some strong considerations that I have not seen mentioned elsewhere. These “other considerations” should be scrutinized by you and your real estate agent before you go looking at homes.

#1 – Set a budget before you go looking at homes

If you start exploring homes for sale before establishing your budget, it typically leads to unfavorable outcomes. In fact, one of three likely scenarios will unfold, none of which are beneficial:

1. You love the home but discover it is not one you can afford. After establishing a budget, you’ll have to look at homes that will not compare favorably to the higher-valued one you went to see before qualifying your budget.
2. You love the home, make an offer, and find that the seller will not accept an offer from an “unqualified buyer.” You then go get qualified but later find that the home is already under contract with another buyer.
3. You do not like the home, and you’ve wasted time.

#2 – Understand current market conditions

Reviewing my articles and videos from 2020 and 2021, when interest rates hovered below 3%, you’ll find I advised buying as much home as feasible. This meant stretching to what the bank would allow and what you felt was sustainable. My guidance wasn’t to buy a home that met immediate needs but rather to aim for the next one, the home you’d aspire to after the current one. For those already in their ‘next home,’ I recommended refinancing to capitalize on the exceptionally low rates of that time. It was a unique opportunity that savvy buyers leveraged to their advantage.

Mortgage interest rates were at all-time historical lows, and I knew they would not last. Additionally, the supply of homes was at a historical low, so I knew home values would rise faster than ever. The combination of rising prices and historically low rates suggested a future with much higher home prices and much higher mortgage interest rates.

Some YouTube viewers criticized me, claiming I was merely acting as a salesman by urging people to buy now. This perspective is misguided, as I’ve since received numerous appreciative comments on these videos and articles. One particular comment from a viewer named Edward stood out and motivated today’s post. Here’s a simplified account of Edward’s experience.

#3 – Look For Homes With Assumable Loans

Did you know that many of the home loans put in place from purchases and refinances since early in 2009 have assumable loans with interest rates below 5%? It is easier to qualify to assume one of these loans than it is to get a new one today (because they have lower rates).

Unfortunately, most real estate agents today do not understand loan assumptions. How do I know this as a fact? When I open the Tallahassee MLS, do a home search of available properties, and specify I want homes with assumable loans, only 2 show up out of nearly 850 homes (less than 1/2 of 1% of listed homes). I suspect that more than one-third of all homes for sale today have assumable loans!

The lack of recognition by real estate agents wastes most assumable loans. The homes get sold to unknowing buyers who obtain loans for longer terms, higher interest rates, and much higher monthly payments.

The older the loan, the harder it will be to assume (as much of the loan has been paid down, so you’ll need to be able to pay for the difference between the loan amount and the sales price. But there are methods available there, too!

When you are interviewing agents for the job of helping you buy your next home, ask them to talk you through their experience with assumable loans. One recent buyer I know of purchased a home with an assumable loan with a 3% rate (just as the mortgage market was hitting 8%). The family buying the home will save about $900K over the life of the loan!