Tips for figuring out how much house you can afford
Buying a house is an exciting time. But before you can begin your house hunt, you must first know how much house you can afford so you can look for homes that are in your price range.
If you are not sure how much house you can afford, there are a number of ways you can go about figuring this out. Mortgage brokers and financial experts estimate that most homeowners should expect to spend roughly a third of their total income financing their house.
But there is more to it than just cutting your total income into a third. When deciding how much they will lend you, a mortgage lender will typically take the following into consideration:
Credit history. While you don't need perfect credit to own a home, the better your credit, the better your chances of getting a mortgage loan and the lower your interest rate will be.
Monthly gross income. This is how much you make before taxes.
Debt to income ratio. If you already have a lot of debt, lenders may be hesitant to finance you if it is likely you could default.
Down payment. How much money you have for a down payment, typically around 10 to 20 percent of the price of the home, will also be taken into account. A higher down payment will bring down the amount of the loan, making your monthly payments smaller, or allowing you to purchase a more expensive home if you have a high down payment.
Figuring out how much house you can afford
The following are a few tips that will help you determine how much you can afford to spend on your home:
Your monthly mortgage payment should not be more than 28 percent of your gross monthly income (before taxes). This is your housing expense ratio. Keep in mind that the 28% also includes principal, interest, real estate taxes and homeowners insurance, not just mortgage.
Your total monthly debt should be no more than 36 percent of your gross income. Things included in total debt includes the mortgage payment plus other such things as car loans, child support, credit card bills, student loans, and so forth. This number, your debt-to-income ratio, is also considered.
Real estate taxes. You will need to know the local tax rate, as taxes are part of your monthly mortgage payment and will differ with each county or even area. You can ask your real estate agent, or call the tax office in the town and ask what the local tax rate is.
Homeowner's insurance. This is required of all homeowners in order to get a mortgage. You can get an estimate of the costs of homeowners insurance from your insurance agent or an insurance company where you are house hunting.
To get an idea of how much house you can afford, you can plug in the above figures (income and monthly debts) into a number of online calculators that will help you to determine the price range of homes you can afford. These calculators are a rough estimate but are still very useful. You can find them on most real estate sites or finance or money sections of various websites.