How to Figure Out Your Home Buying Price Range

Buyers should figure out their home buying price range before looking at homes.

Sometimes buyers in Sacramento want to look at homes without really knowing their home buying price range. Yes, even today, we work with home buyers whom, although might be attracted to a certain type of home, really have little idea whether it’s affordable or manageable for their situation. They might get upset if an agent asks the routine question: do you have a preapproval letter?

But the letter is not for the agent. It’s for the buyer and the seller. The preapproval letter tells the buyer her maximum home buying price range, and the letter assures the seller that the buyer is qualified to buy the home. The agent doesn’t really figure into the picture. Many Sacramento buyer’s agents will show homes even if the buyer is not preapproved or doesn’t know her home buying price range because agents want to establish a rapport with the buyer and hopefully work with the buyer in the future.

Further, agents don’t want the buyer to develop hurt feelings if the buyer is not qualified to buy the home. Little is worse than finding that perfect dream home and later discovering you are not allowed to buy it because it’s outside of your home buying price range. But what can you do if the lender is not available to talk with you right away or their offices are closed, and you want to see a home? You can ballpark the number yourself using a handy tool.

Without getting into the front-end and back-end ratios, let’s just assume you really have little revolving debt and you make a good income. Those two things can affect your home buying purchasing power, and vary with the type of loan you choose and your credit. For purposes of this illustration, we’re just looking at the sales price to find your home buying price range. It’s a way to work backwards.

Start with the maximum mortgage payment, which should be about 1/3 of your combined gross monthly income and include taxes, insurance and mortgage insurance. You can use my Sacramento mortgage calculator to determine your home buying price range. Plug in the sales price of the home you think you would like to buy. Enter a down payment, the minimum for FHA is 3.5% and the average minimum for conventional is 5%.

You can leave the term of the loan at 30 years but enter an interest rate applicable to today’s rates. You can check today’s interest rates online. Rates today are below 4%, so using 4% is fairly safe. If you were looking at a home for sale priced at $400,000, using those numbers, your PITI mortgage payment would be just under $2,500. (There will also be about 3% of the sales price you will need to set aside to pay your buyer’s closing costs.)

Is $2,500 a comfortable payment for you? If not, adjust the sales price up or down and start home shopping. Do not make the mistake, though, assuming that you can look at homes priced higher than your comfort zone and offer less. Not much chance of that happening in our seller’s market in Sacramento. You may need to look at homes priced slightly under your top price range and be prepared to offer at list price or above.

If you need a buyer’s agent in Sacramento area, we work in four counties. Please contact the Elizabeth Weintraub Team at 916.233.6759.