How do I know if I can afford a House?

Buying a home is one of the most important decisions that you will ever make. A new home can provide a solid foundation for yourself and family. It also plays a big role in your financial health. However, buying a larger home than you can afford can become a major burden and source of stress.

Purchasing a home
How do I know if I can't afford a home?

Here are some negative signs to consider before purchasing a home:

1. It's outside your budget

This may seem obvious, but you'd be stunned at how often home buyers set a budget and allow themselves to go beyond it. A budget exists for a reason. Going beyond the budget means you are stretching yourself beyond where you previously felt financially comfortable.

2. Making assumptions about future income and expenses "We're getting a larger house because we'll probably make more money in the future."

It's impossible to predict future income and expenses with any real accuracy. Taking a conservative approach will allow you to save money, invest, and eventually pay off that house completely.

3. You're unable to pay a 20 % deposit There are key advantages to putting a sizable deposit on a home. The more you put down, the less you'll have to borrow, so you'll start off with a larger piece of equity in the home. Putting more money down also likely means a lower interest rate, and less in interest payments overall.

4. Your interest rate is high If you have a lot of debt or a low credit score, you may end up with a higher-than-average interest rate. This means your monthly bond payment will be higher. First take a step back and and focus on getting your finances in good shape, or you could be trying to buy a house that's too costly.

5. Your decision is heavily guided by emotion It's on a perfect street and the school district is great. It's expensive, but it's your dream home. A dream home could become a nightmare if you allow emotions to be your only guide. The entertainment area, the two-car garage, and the granite countertops aren't going to seem so special when you have trouble making the monthly payments.

6. You have unusual mortgage terms Obtain a home loan over 20 years and not 30 years. A home purchased at R1Million over 20 years will end up costing you R 2,3 Million and over 30 years R3,1 Million. There are better things you can do with the extra R800,000 paid in interest over those additional 10 years. Paying so much interest is ridiculous when you consider the difference in monthly installment between 20 and 30 years in only R1,000.

7. You are nearing the maximum mortgage that you qualify for. When applying for a mortgage, banks will tell you that you've been approved for a home loan up to a certain amount. This is the maximum amount that you can borrow, not a guideline of what you should spend. The actual amount borrowed should never be close to that maximum. Don't get too excited about what the bank says. Set your own budget and stick to it.

8. Your payments exceed 30% of monthly income. Don't pay more than 30% of income on housing costs. This is a helpful guideline for determining if you are overburdened by a bond or rental payment. Anything higher begins to strain your ability to meet other expenses and save for the future. If buying a home would put you over this threshold, consider looking for a cheaper house.

9. Your debt-to-income ratio is approaching 43 %. In addition to the 30% guideline, banks will examine whether to approve the loan. They will add up all debt including vehicles and compare it to your income. You may not be approved if that ratio is more than 43%. If close to that threshold, you are truly living on the edge financially. Remember that salary increases do not always match inflation.

10. Borrowing from a Retirement Account Many home buyers borrow from retirement accounts to help cover the deposit for a home loan. While it’s true that you can withdraw funds penalty-free, it’s also true that you are unplugging funds that were intended for the future. If dipping into retirement savings is the only option for purchasing a home, that is a warning sign.

11. You Have a Sinking Feeling It’s not uncommon to get cold feet before the biggest purchase you will ever make. If you can’t shake that sinking feeling you’re probably about to bite off more than you can chew. It’s not easy to admit, but you will know deep down if the home you’re buying is too much.

12. You haven’t done your homework When purchasing a home, approach it with a clear head. Don't forget about additional costs like rates and taxes, levies, insurance, security and maintenance. Remember that the real estate agent may steer you in a direction that benefits their pocket. Realistically review options and choose what is best. You’ll thank yourself later!

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