Home prices in the Bay Area have risen steadily in recent years. Some cities have experienced double-digit increases over the last year alone. While prices appear to be leveling off in many markets, affordability is still a concern for many home buyers.
And many of them have the same question: How much house can I afford to buy in the Bay Area?
Some financial experts recommend spending no more than 33% of your income on a monthly mortgage payment. There are other formulas and rules of thumb out there, as well. But these “rules” are generic and might not apply to your particular situation. So you’ll want to create a budget for yourself. Here’s how to do it.
How Much Can You Afford to Buy in the Bay Area?
How much of a monthly mortgage payment can you take on, without sacrificing your quality of life, your savings, etc.? If you don’t have a specific number in mind right now, you’ve got some homework to do.
Before talking to mortgage lenders, or shopping for a home, you’ll want to sit down and review your monthly income and expenses. This will help you determine a maximum mortgage payment.
For starters, compare your net monthly income (or “take-home pay”) to your non- housing-related monthly expenses. Non-housing expenses include gas, food, credit card bills, car payment, entertainment, and savings account contributions.
Subtract your monthly non-housing expenses from your take-home pay, and you’ll have a good number to start with. This is what you have available to put toward a mortgage payment each month. You probably don’t want to use this entire amount — that would leave you without any emergency funds. But it does give you a starting point for your monthly home-buying budget.
It’s wise to keep an emergency fund in the bank to help you cover unforeseen expenses, job loss, or other financial hardships. Many experts recommend keeping three to six months worth of living expenses in the bank, to serve as an emergency fund. So be sure to include this in your planning, when trying to figure out how much house you can afford in the Bay Area.
Housing Budget First, Pre-approval Second
Mortgage pre-approval can be a very helpful step during the home-buying process. This is when the lender reviews your financial situation to determine how much they are willing to lend you.
Getting pre-approved for a loan will help you narrow down your property search. It will also make sellers more inclined to accept your offer, since you’ve been screened by a lender already.
But there’s an important distinction to be made here. Pre-approval does not tell you how much of a house you can comfortably afford. That’s something you have to determine on your own, and it’s best to do so before you talk to mortgage lenders.
Closing Costs and Down Payments
As a home buyer, you also have to think about your closing costs and down payment. These are up-front expenses that can affect how much house you’re able to buy in the Bay Area.
Down payments can range from 3% to 20% of the purchase price, depending on the type of loan you are using and other factors. VA loans offer 100% financing, which means no down payment whatsoever. Closing costs for home buyers in the Bay Area range from 3% to 5% of the purchase price, on average (though they stray outside this range).
So there are upfront costs and long-term costs to consider, when determining how much house you can afford. You want to keep your monthly mortgage payments at a manageable level. But you also need to consider your upfront expenses, including closing costs and down payment.
Need help? Bridgepoint Funding serves home buyers and mortgage shoppers in the San Francisco Bay Area, with an emphasis on the East Bay in particular. We offer a variety of loan programs with flexible requirements. If you would like to get pre-approved for a home loan, to help you narrow down your price range, please contact a member of our staff today!