Have you always dreamed of building a new home but you are not sure if you can really afford it? Have you qualified for a new home loan, but now don’t know the next step in finding the right size house plan to fit your needs and your budget?
Or is your spouse like “budget….what budget??” You money minded folks know exactly what I mean!
I am going to show you the basics of how to determine your budget for a new home.
So, how much house can you possibly afford? Let’s look at some basic math!
One of the things lenders look at when determining how much you can borrow is your DTI or debt to income ratio. Most lenders do not want borrowers having monthly mortgage payments larger than 28% to 36% of their gross income. Your mortgage payment consists of PTI, which is payment, taxes and insurance bundled into one sum. Keep in mind some states have very high property taxes that can make a significant difference in your PTI. Here in Arkansas, our property taxes are definitely on the lower side.
So let’s do some basic math: (these figures are for example only)
Gross monthly income ___________ x .28 = $____________ mortgage payment
Gross monthly income ___________ x .36 = $_____________ mortgage payment
So let’s say for example your gross monthly income is $5,000
$5,000 x .28 = $1,400 PTI payment
versus
$5,000 x .36 = $1,800 PTI payment
By changing what percent of your monthly income your PTI will be, you can significantly affect the size of house you can afford to build for your area. $400 is almost a 25% difference in total payment, based on your monthly income and your current DTI.
Let’s pretend you figured out you can afford to spend $200K on the construction of a home.
Based on information for the National Home Builders Association, the average cost to build a house is between $100 and $160 per square foot depending on the location and size of the home you wish to build. (keep in mind that the cost of building is usually about 75% of the cost of the project, because you must add property and design costs)
Time for more MATH! OH NO….you hate MATH?
$200,000 / $100/sf = 2000 square feet
versus
$200,000 / $160/sf = 1250 square feet
WOW! That is a huge size difference! Is this what you expected? Can you afford the floor plan you just picked out? Wouldn’t this have been great to know ahead of time, before you spent 10 million hours scouring the internet for just the right plan? Not there yet, GREAT, you will be prepared ahead of time!!
Keep in mind, this is just the basics that you need to be aware of as you start your journey of building a new home. If you want some more guidance, check out my free resources, especially the “Home Design Planning Guide for Couples” where I offer you a FREE video guided workbook that will help you and your partner begin to navigate this adventure together. And if you want me to hold your hand through the entire process, check out my new course – “Build It Better Together”.
