You’ve decided that homeownership is right for you, and now you need to know if you’re financially ready to buy a house.
There are 3 simple calculations you can do to evaluate your current financial situation, how much house you can afford, and the maximum home price that you should consider.
1. Calculate your net worth.
Calculating your net worth is basically subtracting what you owe from what you own.
Add up everything you own, including other real estate, vehicles, jewellery, household items, investments, and savings. These are your assets.
Next, add up everything you owe, including current mortgages, vehicle loans, student loans, credit card debt, and other debt. These are your liabilities.
Now subtract your liabilities from your assets and you have your net worth. This tells you your current financial situation and how much you can afford as a down payment.
2. Calculate your monthly expenses.
Hopefully, you’re tracking your monthly spending with a monthly budget. If you are, then determining your monthly expenses should be simple. Knowing what your monthly expenses are compared to your monthly income will show you how much of a cushion you have that can go toward a new mortgage.
3. Calculate your monthly debt payments.
This is more specific than just your monthly expenses; this includes all debts you pay towards every month, including loans, credit cards, leases, and property mortgages. If your debt load is too high, it could affect which institutions will lend to you.
Once you understand these 3 variables, you can make the best choice for you and even save yourself money.