From The American Dream Team at Cornerstone Land Abstract…Your Personal Advisors and Trusted Translators of Real Estate Gibberish

Money…the great dream maker, and dream crusher. Especially in the world of real estate. I think it’s time we have “the talk.” You may be going to open houses of four-bedroom colonials with wraparound porches and twin sub-zero refrigerators while you’re on a cooperative studio apartment budget.  So begin your search by asking yourself the adult question: how much house can I actually afford?

Start with what’s in the bank. Next, subtract six months of living expenses (for emergencies and those “surprise” expenses no one warns you about, like replacing a 40-year-old boiler). What’s left? That’s your starting point for a down payment and closing costs.

Look at the Numbers

Let’s run some rough numbers. You’ve got $175K saved. You wisely keep $36K for emergencies. That leaves $139K for the down payment and closing costs. Want to avoid the additional monthly expense of private mortgage insurance? You will need to stick with a conventional 80/20 loan. That means 80% of your purchase price can be financed through a mortgage and 20% of your purchase price must come from your savings in your bank account (or DraftKings winnings). Now you’re eyeing homes in the $500K range ($100K to $120K for a down payment with money left for closing costs.) It’s not magic, it’s math.

And don’t forget the real monthly cost. Mortgage payments last longer than most gym memberships (and can’t be ended simply by showing up at the gym and having an awkward conversation with an assistant manager with a six pack and a jumpsuit.) Your payment must be made without fail every month for the next thirty years. Even if you sell sooner, odds are you will buy another house which will also have monthly payments.

Cornerstone founder and veteran real estate attorney Peter Carrozzo has a tried-and-true method for figuring out how much of a monthly payment a first time homebuyer can afford…the fake mortgage payment. How does it work? “For two years before I bought a house, I paid my rent and deposited a certain amount of money into a bank account the first week of every month. The total of my rent payment and monthly deposit into savings is what I called my “fake mortgage payment”, this was what I knew I could afford. I figured if I could pay this amount for two years, I should be ok for the next thirty years.” So, start paying your fake mortgage payment by depositing what you expect to pay in housing each month. If you can swing it for two years, chances are you’re financially fit for homeownership.

Let’s go back to the down payment for a moment. Unfortunately, life isn’t Monopoly; most people don’t land on Community Chest and have a wealthy uncle hand them a downpayment. (Also, you cannot bring Monopoly money to a closing although we have seen people try!). Here is where the fake mortgage payment really pays dividends (ok maybe we tried too hard with that one). “In addition to determining what I could afford for my mortgage payment, and instilling discipline, the money deposited in savings became my down payment for a house” recalls Peter.

Credit scores and interest rates are the other participants in this financial dance. A low credit score and high interest rate? That’s a one-way ticket to an unaffordable mortgage.  Aim for a score in the 700s and know today’s rates. (Hint: it ain’t 3% anymore.)

Why Involve Cornerstone Early?

We don’t just show up at closing with a stack of documents. We’re your behind-the-scenes financial bouncers, making sure no surprises crash your mortgage party. We know the right people to assist you in financing your home. With Cornerstone and our partners, you get clarity, not confusion.