One of the first questions every potential homeowner asks is how much house I can afford, and rightfully so! Making sure you get the correct answers is equally as important. Making sure you can afford the right home is as important as deciding where you want to live.
This article will take a deep dive into discovering how to get your questions answered and start doing the research. Of course, this is just the first step when making that determination, but it’s a good start.
Does The Real Estate Market Determine How I Can Get The House I Can Afford?
Although the real estate market shows that it is a seller’s market, the upturn in the economy benefits buyers. More importantly, the recession of 2008 hit the housing market hard, but after years of recovery, now is the perfect time to invest in your residence.
More so, whether you want a beachfront condo or a single-family dwelling in the suburbs, purchasing real estate is a solid financial investment. It also provides opportunities to make memories, develop your green thumb, and watch your children grow up. Finally, you can ask how much house can I afford and start the process quickly.
However, the dream of homeownership can seem out of reach or crushed before you ever attend the first open house if your finances aren’t in order. Since rents are rising, it’s a good time to start looking at your options. Why not buy your own home and start investing in your future right?
Moreover, while most housing economists project mortgages should remain below 4% for the upcoming year, it’s a good time to start researching.
Credit History and Worthiness – How Much House Can I Afford?
Unless you have several hundred thousand dollars in the bank, you will probably need financial assistance buying your home. Not only will you need to have a stable income to support your mortgage loan application, but the lender will also check your FICO credit score.
For example, a three-digit number reveals your fiscal responsibility and how well you manage your debt accounts. The higher your credit score, the more likely you will receive lending terms that benefit your financial status (such as a lower interest rate or higher approval sum).
Several factors go into determining your credit score, but payment history, length of credit history, new accounts, types of credit accounts, and credit utilization are the primary considerations.
You can have a basic understanding of your financial status by monitoring your credit report throughout the year. You should begin working on your credit score long before you are ready to buy a new home.
Before deciding on the perfect home, you need to have a realistic assessment of how much mortgage you can afford.
However, in addition to checking your credit score, a lender will also look at the household income, available savings for use in a down payment, and monthly debt obligations. It might seem like a simple equation, but there can be times when unplanned spending or unexpected expenses can drain your savings account.
Some lenders specialize in loans for people in specific occupational fields and geographic locations, so be sure to look into a multitude of loans to be sure you find the one that best fits your situation. For example, if you’re a medical practitioner living in one of the boroughs, you may want to look into doctor loans in New York.
For instance, a solid plan is to have at least three months of mortgage payments and other expenses held in reserve for emergencies. This can also bring peace of mind to the lender that there is somewhat of a contingency plan for mortgage repayment.
Debt-to-Income Impact – How Much House Can I Afford?
One of the critical factors a lender will consider when calculating how much money you can borrow is your debt-to-income ratio or the DTI ratio.
This metric takes your total monthly debt payments and compares them against your monthly pre-tax income. It is important to note that many things contribute to your credit score, such as your mortgage or insurance payments, a car loan, or student loan debt, which can be refinanced if needed with companies such as Purefy.
Above all, your credit score might show that you are qualified at a higher ratio, but banks don’t like to issue housing loans that will exceed 28% of your monthly income.
For example, if your pre-tax monthly income is around $4,500, the maximum mortgage payment that banks will approve should be below $1,260 a month. You can also guesstimate how much of a mortgage you could afford by taking your monthly income and multiplying it by .028.
Using an FHA Loan
There are several types of funding opportunities for homebuyers, and in some locations, the property may qualify for an FHA loan. More so, while most lenders want 10% down on a mortgage application or some equivalent collateral, an FHA loan lowers the down payment to a minimum of 3.5%.
The FHA qualifying standards are also more lenient and relaxed than traditional loan processes, and an FHA could be the way to go if you have a low credit score.
Additionally, there are several FHA mortgage calculators online that you can use to determine how much mortgage you can afford. If you have a high credit score and low DTI ratio, your lender may reduce your down payment to as low as 3% of the loan amount.
Using a VA Loan
For those with a military connection, you may be able to purchase a house through a VA loan. This is a huge benefit, as mortgages backed by the Department of Veterans Affairs rarely require a down payment. These loans also don’t usually require PMI or mortgage insurance, and possibly limits placed on the buyer’s closing costs.
The Bottom Financial Line
Considering how much house you can afford, a wise strategy or approach uses the 28% to 36% rule. While the housing payment shouldn’t be more than 28% of your monthly income, you shouldn’t have more than 36% of your monthly income spent on other debts.
In addition, these can run the gamut of credit cards, student loans, automobile leases, or other credit accounts. To illustrate this point, imagine earning around $5,500 a month and holding about $500 a month in existing debt payments. With these costs, your monthly mortgage costs shouldn’t exceed $1,480.
These numbers and ratios are reasonable, but you shouldn’t base your entire living situation on these figures. You will need to consider your whole financial situation when looking at how much house you could afford.
Key Factors of Affordability
There are four factors that you can use to calculate mortgage affordability. These are your monthly income, your cash reserves for closing costs and down payment, your monthly expenses, and your overall credit profile.
Similarly, your income will include the money you regularly receive, which gives you a baseline for what you can afford each month. Your cash reserves are the resources available to cover upcoming closing and down payment expenses.
Your debts and expenses can typically be calculated according to the total monthly debt obligations you have. The credit profile is your credit score and the amount of debt you currently have responsibility for.
Despite your desire to live in a beautiful, spacious home, you don’t want to feel like a financial hostage to an unaffordable mortgage. Knowing the reality of how much you can afford to spend each month on housing can help you tailor your search to a new home within your price range.
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Also, don’t forget to read Selling A House During A Divorce: What You Need To Know too!