How Much Home Can You Afford?
November 29th, 2014
November 29th, 2014
If you’re looking to buy a home, one of the first questions you may ask is, “How much home can I afford to buy?” Unfortunately, there’s no “magic” figure, it all depends on a number of factors, including your income, savings, credit score, debt, interest rate and personal preferences. Therefore, before you start your house hunting, you need to take a long look at your finances to determine how much you can realistically afford. The following are some things you need to consider so you don’t get in over your head.
1. Your debt-to-income ratio. Lenders use your debt-to-income (DTI) ratio to determine if you have enough income to cover your new monthly mortgage payments and any existing monthly debts, like credit cards, car loan and student loan payments. To get your DTI ratio, add up your total monthly debts and divide that number by your monthly gross income. The Consumer Financial Protection Bureau recommends that your debt-to-income ratio be less than 43%. However, many financial experts recommend that you should try to be debt free before buying a home.
2. Your credit score. Based on your credit report, credit bureaus and financial organizations use a mathematical formula to come up with your credit score. This score helps lenders determine how likely you’ll repay your loan on time. While your score can vary from lender to lender, most scores fall in the 300-850 range. The higher your score, the more likely you’ll qualify for a mortgage loan and get a better interest rate.
3. Mortgage and house-related expenses. When you close on your new home, you’ll likely have to pay for additional fees or closing costs like title, recording and appraisal fees. Also, a house comes with other expenses besides your monthly mortgage payment, so make sure you consider these additional monthly expenses, like homeowners’ association fees, utilities, maintenance and repairs. Plus every new home comes with upfront expenses you may need to make, like appliances, window coverings, furniture and household goods. Make sure you have money saved or coming in each month to cover these mortgage and house-related expenses.
4. Your future expenses. Consider any future expenses you may incur, such as going back to school, having a baby or starting a business. Ensure you have ample savings or future income to cover these costs.
5. Your down payment. Depending on your credit score and the type of loan you qualify for, you may have to make a down payment of 0% to 20%. Many financial experts recommend that you have a down payment of at least 20% of your home’s purchase price saved.
6. Your emergency savings fund. You never know when you may lose your job or have unexpected expenses arise, many experts recommend that you save enough money to cover up to 6 months of mortgage payments and household expenses.
Now that you’ve taken a look at your overall finances, you need to decide how much you would be comfortable paying as your monthly mortgage based on the expenses outlined above.
Once you have an idea of the purchase amount you can afford, you can calculate your monthly mortgage payments by clicking here to use Grandview Lending’s free mortgage calculator. If you need help determining how much home you can afford, contact the mortgage specialists at Grandview Lending. Our specialists can help you find different mortgage options to meet your needs and look at the different scenarios to determine a monthly mortgage payment that you’re comfortable with. Call us today at 866.690.4920.
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