Retiree considers selling townhome, purchasing larger single-level home

I currently own a two-bedroom, one-and-a-half-bath townhome, which I would sell. I am single and want to buy a three-bedroom, two-bath home so I have more space.

I’m trying to figure out how much I can afford to spend. Can you recommend a good website or calculator? I would like to have a good idea how the numbers work before I contact a realtor or mortgage lender.

I love your column and recently read Ilyce’s book, “100 Questions Every First-Time Home Buyer Should Ask.” Even though I’m not a first timer, it was very helpful and interesting. Thank you.

A: Thanks for the kind words about Ilyce’s book. In it, she walks readers through a formula that helps you calculate how much money you can spend to buy a home.

But let’s go through the numbers here, because many homebuyers are in the same position you are. According to a Redfin report, homebuyers everywhere need significantly more income to qualify for a mortgage. That’s particularly true in the Sunbelt, where home buyers in Tampa, Phoenix and Las Vegas need 40% more income than last year to afford a typical mortgage payment.

That’s a problem for many seniors who seek a sunny retirement but are living on a fixed or limited income. Whether they want to upsize in retirement to have more space or are looking to move closer to family or friends, affordability is always the issue. Given how fast home prices have risen over the past five years, a lot of readers wonder whether they’ve been priced out of moving altogether.

We’re going to make some assumptions about what you can spend. Since you’re already a homeowner, we’re going to assume that you have at least some equity in your townhome. That should help make your next purchase a little more affordable. We’re also going to assume that as a retiree, you’re on a fixed income. Whatever you spend, make sure it’s affordable given your current financial situation.

First, how much income do you have? As a retiree, you probably have Social Security income. Do you also have a pension? Is there any annuity or investment income? Do you have a part-time or full-time job that you intend to keep? Do you have anybody in your household that can contribute any regular income?

Next, what sort of debt do you currently carry? Do you have a mortgage or credit card debt? Do you have student loan debt (for yourself or your children or grandchildren)?

What are your ongoing expenses? What health care costs do you regularly pay outside of your Medicare check? What about food, utilities, Wi-Fi, cable, transportation, travel, or entertainment?

Once you have a good handle on your income, debt and expenses, you’ve got the essential pieces of your budget. Now, you need to know what your credit score is, since that will drive the interest rate on your loan.

If you can buy a new property without a mortgage, you’ll be stronger financially. If you need a mortgage, you’ll have to qualify just like any other buyer. A lender will allow you to spend up to 36% of your gross monthly income on your total debt. So, if you receive $60,000 in annual income (comprised of Social Security and a part-time job), that’s $5,000 per month. You should be able to spend 36% of $5,000, or $1,800 on your mortgage, real estate taxes and insurance plus any other debt you carry.

Remember, just because a lender will allow you to spend $1,800 per month on your total debt doesn’t mean you should. That number may be too much for you to comfortably shoulder with other expenses you’ll have going forward.

The trouble is that the $1,800 per month won’t go as far as it did even five years ago, since home prices have skyrocketed and interest rates have doubled since early 2021.

All search engines offer links to mortgage calculators that you can try. If you put “mortgage calculator” into Chrome, for example, it will offer you almost 2 million links as well as its own, with “monthly payment” or “purchase budget” tabs.

The Chrome calculator we tried gave this result: a $300,000 30-year mortgage at 5.75% will require a monthly payment of $1,802, including $400 in taxes and fees. The calculator allows you to add your state and your credit score range to give you a more accurate estimate of costs.

You should try several different online calculators. Understand that these calculators are optimized with backlinks to mortgage companies, and are designed to generate revenue for the websites or browsers. That doesn’t mean you won’t get a good or fair deal. But you have to be wary and shop around.

Be sure to speak with a few different lenders (including a national bank, a local bank, a credit union, an online lender and a mortgage broker) to get a better idea of what you can afford and what sort of loan they’d approve based on your income and credit history. If you need a referral, talk with your real estate agent or attorney.

(Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (4th Edition). She is also the CEO of Best Money Moves, an app that employers provide to employees to measure and dial down financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact Ilyce and Sam through their website, bestmoneymoves.com.)