Can I Afford A Big Home?
You need to take into consideration a few key factors when calculating how much home you can afford. These include your household income, debts such as car loans and student loans, and any savings that are available to make a deposit. You’ll need to be comfortable with your monthly mortgage payment as a home buyer.
Unexpected expenses and unplanned expenditures can affect your savings, even if your income and monthly debts are relatively stable. All of this needs to be taken into account when you are buying a home.
As a rule of thumb, you should have at least three months’ worth of monthly payments in reserve, including the housing payment as well as other monthly obligations. This way you can cover your mortgage in the event of an emergency.
How your debt-to-income ratio affects affordability
An important metric that your mortgage lender uses to calculate the amount of money you can borrow is the DTI ratio — comparing your total monthly debts (for example, your mortgage payments, including insurance and property tax payments) to your monthly pre-tax income.
You may qualify for a higher ratio depending on your score. However, in general, your housing costs shouldn’t be more than 28% of your income.
If your mortgage payment is $1260 per month, including taxes and insurance and you earn $4,500 a year before taxes, then your DTI will be 28%. (1260 / 4500 = 0.28)
You can reverse the process and find out what your housing budget is by multiplying your monthly income by 0.28. This would result in a $1,260 mortgage payment to achieve a DTI of 28%. (4500 x 0.28 = 1,260).
How much house can I afford with an FHA loan?
To calculate how much house you can afford, we’ve made the assumption that with at least a 20% down payment, you might be best served financing with a conventional loan . However, if you are considering a smaller down payment, down to a minimum of 3.5%, you might apply for an FHA loan .
If you are a person with a low credit score, FHA loans may be a good option for you.
Conventional loans are available with as little as 3% down. However, qualifying for these loans is more difficult than FHA loans.
How much house can I afford with a VA Loan?
With a military connection, you may qualify for a VA loan . That’s a big deal, because mortgages backed by the Department of Veterans Affairs typically don’t require a down payment.
What is the 28/36 Rule?
To calculate ‘how much house can I afford,’ a good rule of thumb is using the 28/36 rule, which states that you shouldn’t spend more than 28% of your gross, or pre-tax, monthly income on home-related costs and no more than 36% on total debts, including your mortgage, credit cards and other loans, like auto and student loans.
For example, if you earn $5500 per month and have to pay $500 in debts, your mortgage payment should not exceed $1480.
You can use the 28/36 rule to determine your home affordability. However, you should also consider all of your financial circumstances when determining how much you can afford.
What factors determine how much house you can afford?
Key factors in calculating affordability are 1) your monthly income; 2) cash reserves to cover your down payment and closing costs; 3) your monthly expenses; 4) your credit profile.
- Monthly Income: Income is money that you get on a regular schedule, like your salary or investment income. Your income can help you establish what you are able to pay each month.
- Cash Reserves: You can use this money to cover the closing costs and make a deposit. You can use savings, investments or any other source.
- Monthly Expenses: You may have monthly obligations, such as payments on credit cards, student loans or car loans, grocery bills, utility bills, insurance and so on.
Credit Profile: The lender will look at your credit score as well as the amount you owe. These factors will determine the amount of money you can borrow, and the interest rate that you’ll receive.
What is the maximum amount I can afford to spend on a home?
A home affordability calculator provides you with an appropriate price range based on your input. Most importantly, it takes into account all of your monthly obligations to determine if a home could be comfortably within financial reach.
Lenders only consider your current outstanding debts when evaluating your ability to buy a house. Lenders do not consider if you are saving $250 a month for retirement or you have a newborn and need to increase your savings.
How much house can I afford with my salary?
Want a quick way to determine how much house you can afford on a $40,000 household income? $60,000? $100,000 or more? Use a mortgage income calculator to examine different scenarios.
You can calculate your monthly or annual income by entering a home’s price, the amount of down payment that you plan to make, and an assumed mortgage rate. This will also show you how much you could borrow from a lender.
The calculator can also answer the question in a different way: What salary is required to buy a house worth $300,000. Or a $400,000 home?
Mortgage rates are a key factor in determining affordability
You will probably notice that any home affordability calculation includes an estimate of the mortgage interest rate you will be charged. Lenders will determine if you qualify for a loan based on four major factors:
- Your debt-to-income ratio.
- Your history of paying bills on time.
- Proof (and history) of income.
- How much money you have saved for the down payment and other closing costs.
The lender will price the loan if they determine that you are mortgage worthy. This means that you’ll be charged an interest rate. The score you have will determine the mortgage rate that you get.
The lower your interest rate is, the smaller your monthly payment.
Conclusion
As you can see, there are many factors that determine how much house you can afford. Planning ahead to save for a down payment and improve your credit score can be a huge help when buying a home.
Once you know where you stand with regards to a house budget, contact your local Savannah Realtor to start your home search.
