Now that you’ve decided to purchase a house, you will need to determine how much house you can afford. There are plenty of factors you should be aware of when planning to purchase a home. These factors determine the size of the mortgage you can afford to take on and ultimately how much house you will be able to afford.
Homes are expensive ventures that require you to be financially solvent. The trick, however, lies in knowing what kind of house wouldn’t stretch your budget and cause you financial strain in the long run. Let’s look at a few parameters you can use to answer the question.
How Much Are Your Monthly Debt Payments?
Also referred to as Debt-to-Income (DTI) Ratio by lenders. It’s an important metric used to assess your mortgage affordability by measuring your ability to make monthly payments and repay the loans you’ve borrowed so far.
Buying a home is costly and will probably add to your monthly debt payments. To know how much house you can afford, they need to analyze the full impact of all your debts (plus the mortgage payments) on your monthly debt repayments.
For this, there’s the unwritten rule that all the debt repayments should never go beyond 36% of the gross amount you make every month. To put that in context, let’s take the example of someone who earns $30,000 a month. Such a person’s total debts repayments per month shouldn’t exceed $10,800. Using that guide will let you know the amount of debt you can take on comfortably.
The Home’s Down Payment
Can I afford the home’s down payment? This is an important question that should linger in every potential buyer’s mind. Down payment is critical in determining how much house you can afford because it determines the loan-to-value ratio or LVT.
The higher the down payment, the lower the LVT. Lower LVT guarantees you lower interest rates because it presents mortgage issuers with less risk. Starting out with more equity on your new home has its perks, such as avoiding private mortgage insurance (PMI), which can hike your monthly mortgage payments by up to $70 per month.
The down payment varies with different houses and locations. Some will have significantly high down payments, which might mean taking on an enormous debt that could stretch your finances. Others have lesser down payments, and you won’t struggle to pay the monthly payments. Always consider this whenever you are analyzing a house you can afford.
Your Total Gross Income
Besides all other parameters, it all comes down to your income. There’s no avoiding the fact that you will need to have a good and stable income to buy a home comfortably. And, naturally, the higher the income, the more the house you can afford.
Your Total Savings
If you are wondering, How much house can my savings get me? Then you should know, if you have at least 25% of your dream home’s value, then you are ready to buy a home. Then also, there are many often overlooked hidden expenses of buying a home that many buyers don’t consider till closing day. For instance, down payment, agent fees, moving fees, and closing costs. If you can cover these buying expenses in cash, you might save a great deal on your overall home-buying budget and mortgage.
The amount of savings you have determines how much home you can buy, basically, the lower the savings, the lower the home you can afford. The inverse is also true. Your savings also act as your reserves in case things turn sour. It’s wise to have about three months’ worth of savings in case you temporarily lose your income.
Your Home Expectations
The final parameter that determines how much home you can afford is your expectations. Everyone has them. Some people want a home in a specific neighborhood and a specific type of home.
Of course, different homes come at different prices, which is why you should set appropriate expectations at the start of your home buying process. It’s pretty basic advice, but you can set yourself up for a more expeditious house buying process by doing so. For instance, a clear analysis of your current financial position should help you to determine how much home you can afford objectively.
