How Much House can I Afford?

 


How Much House can I Afford?

By: Greg McKinney Mineola TX

Buying a house is exciting, but before you look for your dream home, you should know how much home you can afford. The typical rule is to keep your total debts including your new mortgage at 36% of your gross monthly income (income before taxes). But there are a few other factors you must consider. 

Calculating your Debt-to-Income Ratio 

Your DTI is the comparison of your monthly debts to your income before taxes. Your monthly debts consist of any student loans, personal loans, car payments, minimum credit card payments, and the total mortgage payment (principal, interest, taxes, and insurance). 

Keeping your DTI at 36% ensures financial affordability and security while allowing you to borrow money to buy a home. Most banks, however, go up to a 43% DTI if your other qualifying factors allow it. 

The Down Payment 

Another factor in how much house you can afford is your down payment. Your down payment does two things - it gives you equity in the home (your own investment) and it lowers your monthly mortgage payment. 

Ideally, you’d have a 20% down payment, or $20,000 for every $100,000 in home price. While it’s possible to secure financing with less than 20% down, you’ll pay for mortgage insurance to make up for the risk of default that putting down less than 20% creates, which increases your DTI and lowers the amount you can borrow. 

Cash Reserves 

Most loan programs today don’t require you to have cash reserves, but it’s a smart idea if you want to be financially secure even after taking out a mortgage. Aim to have at least 3 months of mortgage payments put aside. This ensures that you can make the mortgage payment for at least 3 months if something goes wrong with your job or income temporarily. 

Having cash reserves also provides a compensating factor for lenders. For example, if you have a lower credit score or higher down payment than lenders prefer, having cash reserves may increase your chance of approval. 

Get Prequalified, but Know what you can Afford 

It’s always a good idea to get prequalified by a lender to see what you can afford. This isn’t a guaranteed approval, but an estimate of what they’ll lend you if all factors come together. This gives you an idea of what they say you can afford. You can then plug the numbers into your budget to see if it’s something you can comfortably afford. It’s always a good idea to borrow slightly less than you can afford to say financially stable. 

Final Thoughts

Knowing how much house you can afford before you buy a home is important. You’ll have time to make sound financial decisions and not get in over your head. Buying a home is one of the most exciting times and it can be a great investment as long as you don’t get in over your head.

Take the decision seriously and know what you can comfortably afford so you start homeownership off on the right foot

Greg McKinney Mineola Texas





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