What Kind of House Can I Afford in Santa Cruz, CA?

One of life's greatest thrills for a Californian is becoming the owner of one of those beautiful homes for sale in Santa Cruz, CA. But let's be honest: Figuring out the amount of a home you can afford can be daunting. No one wants to go into a house mortgage to find out they cannot repay it. The question now is, what kind of house can I afford? Now, let's dissect it for you.

The "Should vs Could" of Mortgage Affordability

Determine how much you really need to borrow, not how much you could, before you give any homes for sale ads any more attention and apply for a mortgage. "Should" refers to the mortgage amount that aligns with your aspirations and financial situation in the far future. It considers items like income, spending, and retirement or emergency savings.

 

The "could" indicates the highest possible home loan amount a lender will provide you, considering your income, credit score, and other relevant variables. It may be tempting to borrow the largest amount possible. However, doing so without determining whether it is prudent is a poor financial decision. Problems with making monthly payments, financial stress, and foreclosure are all possible outcomes of taking on too much debt. Before thinking about what you could borrow to buy one of those homes for sale in Santa Cruz, CA, figure out what you should borrow.

Analyzing 'What Kind of Home Can I Afford?' Crunch the Figures First!

Before diving straight into the Santa Cruz homes for sale market, the first step is determining how much money you bring in each month. This includes not just your wage but also rental income and income from any investments you have. The next step is to finalize your housing expenses, total all your debts, and determine how much you can raise as a down payment. Although shorter mortgage terms are available, most Santa Cruz real estate investors favor 30-year durations. Once you have a firm grasp on your actual income and expenditures, the next stage is to use tried-and-true guidelines to establish a maximum home purchase price for homes for sale within your financial means.

Deciphering Home Affordability: The Rule of Thumb to Consider

People who have been through this before have developed many guidelines that should make things easier for you. When calculating your home's affordability, you must consider not just these suggestions but also your unique financial status, lifestyle choices, and long-term objectives. These rules apply to any real estate property, whether you're seeking a luxurious or family neighborhood homes for sale. Standard guidelines that you can apply to determine how much home you can afford include:

The 28/36% Rule

Most mortgage lenders use the 28/36 rule as a reference when calculating your maximum loan amount. You shouldn't spend more than 28% of your total income on your mortgage each month. Furthermore, when additional debts are accounted for, the total amount should be at most 36% of your income. 

 

The front-end ratio (28%) communicates that as you look for houses for sale that are within your budget, go for one that won't make your housing costs (including your mortgage payment, property taxes, homeowners' insurance, and any personal mortgage coverage you may have) exceed 28% of your monthly income.

 

Assuming your household income before taxes is $20,000, the calculation would be $20,000 x 0.28, equaling $5,600. Given these circumstances, you should avoid purchasing a house that requires you to pay a mortgage of more than $5,600 monthly.

 

The back-end ratio stipulates that the sum of all your outstanding loans (including the mortgage) should not surpass 36% of your entire monthly income. What falls inside the 36% might be:

 

●      Mortgage payments

●      Credit card payments

●      Energy bills

●      Homeowners’ association fees

●      Child support

●      Bank loan

●      Car loan

●      Alimony

●      Other expenses

 

With a salary of $20,000 month, the calculation would be $20,000 x 0.36, meaning that you may not be able to afford to own those Santa Cruz properties that would force you to dedicate more than $7,200 from your $ 20,000 income to cover your mortgage and other expenses.

 

When your monthly payment exceeds 28%, lenders become concerned that you could have problems paying back the loan. In a nutshell, they want assurance that your yearly income can sustain your mortgage repayment even in the event of a downturn. If you follow the 28/36 guideline, you'll have enough to pay off your debt and still put aside some emergency funds.

Other Rules

●      The 32% Rule: If you are eyeing grabbing one of the great Santa Cruz houses for sale, this rule tells you that your mortgage, Santa Cruz real estate taxes, homeowners' association fees, property insurance, and any other household costs should not take more than 32% of your monthly income.

●      The 40% Rule: According to this rule, lenders think you are likely to only afford your dream home if your debts are at least 40% of your income. You may determine whether a home is within your financial capability if the sum of your monthly payments, including the mortgage and any other obligations you may have, is at most 40% of your income.

●      The 2.5X Rule: Consider buying Santa Cruz homes for sale only if their price is roughly 2.5 times your average household income. However, this rule's application is conditional on your location. If you live in an area with exceptionally high housing costs (for instance, in Santa Cruz properties; this is often the case with homes for sale in the Los Gatos Mountains, CA, and Capitola homes for sale), you may have to save a little more cash to bridge the disparity between your average income and the cost of housing.

●      The 3X Rule: Let's say your household-income is $ 240,000 a year or $ 20,000 a month. If you set aside at least $5000 for current debts, only look at homes for less than $720,000. So, if you already owe more than 20% of your income, don't consider buying a house that costs more than three times your yearly income.

●      The 4X Rule: If you allocate 20% of your income to existing debts, consider buying a home about four times your annual income or up to $960,000

●      The 5X Rule: This rule may apply to you if you do not have any debt. Think about purchasing a property that is five times your yearly earnings or $1.2M. You're not obligated to accept the entire loan amount if, for example, you're looking into houses for sale and are approved for a loan for a more expensive home.

●       

Homeowner's Expenses and Affordability

Other factors, besides mortgage affordability, also come into play when determining a home's affordability. Among them are:

Home maintenance

Irrigation, painting, electrical work, grass maintenance, plumbing, and so on are necessities for any house. Consider the cost of upkeep and repairs when determining your ability to afford a home.

HOA (Homeowners Association) Fees

Association dues and fees are collected from homes in gated communities, condos, and cooperatives to fund the upkeep of shared facilities. These can include payment for swimming pools, landscaping, security, and more. Please inquire about the HOA's dues and payment frequency and assess whether they fit within your finances before you commit to purchasing even what you believe is one of the cheapest houses for sale.

Interest rates

Consider the long-term implications of accepting a home loan with a high interest rate, even if it seems manageable in the short term. The mere fact that you can now afford a mortgage does not guarantee that you will do so in the coming months or years.

Utilities

They include bill payments for electricity, water, sanitation, and sewerage services. Some people with Santa Cruz homes for sale may be willing to share their current invoices with you, which would give you an idea of the anticipated expenditures.

Property taxes

Mortgage lenders often ask borrowers to escrow their homeownership taxes to include them in their monthly payments. As you assess how much of a mortgage you can afford, determine whether you can pay property taxes.

Homeowner’s insurance: Before closing on a loan, most lenders will insist that the buyer have 

Homeowner's Insurance

When a mortgage is being processed, at least initially, paying the monthly insurance payment via an escrow account is normal practice. Once a substantial amount of equity has been built up in the property, your lender may allow you to directly handle property taxes and insurance payments (i.e., "waive escrow").

Private mortgage insurance

If you consider putting less than 20% of the property as a down payment, your lender will require you to take PMI (private mortgage insurance). However, if you are applying for a government-guaranteed loan, private mortgage insurance may not be necessary. PMI safeguards the lender in case of borrower default.

The Bottom line

Owning a home is a significant life event, and knowing how much home you can afford is vital. Determining our budget and funding the perfect property among the many Santa Cruz homes for sale is the first step toward achieving this dream. Start by clearly defining what you can afford: analyze your savings, debts, monthly expenses, etc. Some people prioritize mortgage pre-approval hunting early. It can help you narrow your choices among homes for sale in Santa Cruz, CA.

 

Understand your down payment, as the amount you put down will significantly impact your buying power. Remember to factor in other homeownership costs, as they can add up and impact how much house you can afford when looking at even the cheapest houses for sale or just Santa Cruz properties in general.

 

Do not limit yourself to one area, as different neighborhoods in Santa Cruz will offer varying price points. Whether you are appealed by the Mediterranean climate of houses for sale in Watsonville, CA, the stunning beaches close to houses for sale in Aptos, CA, or the awe-inspiring sight of Monterey Bay near the entrance of Soquel Creek in homes for sale in Capitola, the advantage of exploring different areas is that you increase the chances of finding a place that meets your lifestyle needs and budget. Lastly, always seek the guidance of industry experts. When you work with a skilled realtor, you can be assured that you won't be blindly navigating the market. 

 

Paul Burrowes, CRS, CCEC, SFR, NHCP, LHC, REALTOR® Licensed REALTOR® with over 15 years of experience and expertise.  Commits to being on time and transparent. Acts as your consultant to ensure you make the best decisions to fit your transaction at every step in the process. Negotiates towards a low stress, win-win outcome. Handles all the details for you, ensuring the hundreds of steps in your real estate transaction go smoothly. Proudly serving Silicon Valley, Santa Cruz, Monterey, and Santa Clara Counties!  | DRE# 01955563 | (831) 295-5130 | paul@burrowes.com | About Santa Cruz and Northern California Real Estate