How Much House Can I Afford?

How Much House Can I Afford?

Owning a home is a dream that many Americans aspire to, and one of the most frequently cited reasons is the belief that owning a home is less expensive in the long run than renting. Money paid to a landlord is seen as nothing but a loss, while payments on a mortgage are viewed as an investment in something of value. However, buying a home is only a financially sound decision if you’re buying a house that you can actually afford.

Tips to Help You Figure Out the Price Range on Your New House

Take “Pre-Qualification” With A Grain Of Salt

The first step in buying a house should be to determine how much you can afford, and prospective buyers often turn to a lender for this information. You can call a bank or mortgage lender or go online and pre-qualify for a certain amount by giving some information about your income, your assets, and your current level of debt. Be aware, however, that the amount you pre-qualify for may not be a loan amount that you can comfortably afford. Savvy buyers need to do their own calculations.

Know Your Income, Expenses, And Debt

Before calling the bank or looking at houses, it’s a good idea to sit down with a pencil and paper or spreadsheet and figure out exactly what you have coming in each month, how much is going out, and how much debt you’re carrying. Make sure to estimate irregular expenses, like doctor visits or car repairs. Once you have a clear picture of your financial situation, you can begin looking at how much you can afford to spend each month on housing costs.

Follow The 28/36% Rule

The 28/36% rule is a standard recommendation for homebuyers. According to experts, a mortgage payment should account for no more than 28% of your total monthly income. To calculate this percentage, multiply your income by 0.28. For example, if you’re earning $5,000 per month, you want to aim for a mortgage payment of $1,400 or less.

In addition, your total debt payments per month should not exceed 36% of your income. Thus, if you’re earning $5,000 a month, you should be paying no more than $1,800 each month on a mortgage, car loans, student loans and credit card debt altogether.

Factor In Other Costs Of Home Ownership

In addition to monthly principal and interest payments, you also need to factor in the cost of homeowner’s insurance and property taxes spread out over a 12-month period. If you’re making a down payment of less than 20%, you’ll need to pay private mortgage insurance (PMI). Furthermore, buyers typically pay closing costs, which amount to about 4% of the selling price of the home.

Finally, homeowners will pay more than renters to keep up their homes. Many buyers find that they need to purchase new appliances or new furnishings when they move into their house. Other costs of ownership include maintenance, repairs, lawn care, pest control, utilities, and in some cases, a home owners’ association (HOA) fee, to name just a few.

Shop For A Loan

Once you have calculated the amount of money you can pay on your mortgage each month along with the amount you’ll need to set aside for repairs and maintenance, you can start shopping for a loan. The interest rate of the loan you get will have a big impact on the size of your monthly payments, so if you can get a good rate, you may be able to afford a bigger house. Lenders consider a customer’s credit score, debt-to-income ratio, and down payment amount when determining the interest rate of a loan.

Know Your Credit Score

Your credit score is a three-digit number assigned by one of the major credit bureaus (like Equifax or Experian), and it’s based on several factors, including your credit history, your amount of debt, and the types of credit you have used. To get a mortgage at all, you’ll probably need a score of at least 620. To get a loan with a good interest rate, you’ll need a score of 760 or above. In general, the higher your credit score, the lower your interest rate.

You can get a free credit report from each credit bureau once a year. When you look at the report, make sure that there are no errors. If there are, you can submit documentation to correct the error and potentially improve your score.

Improve Your Credit Mix

Credit bureaus like to see a credit mix that includes a range of loan types, such as car loans, student loans, mortgage loans, and personal loans. Having a diverse credit portfolio indicates that you know how to manage multiple types of debt. If you have a limited credit history, it may be worthwhile to consider taking out a short-term personal loan from a lender like King of Kash. If you pay off the loan early, you can save on interest and fees while adding to your credit mix and improving your score.

Improve Your Debt-To-Income Ratio

Another major factor that lenders consider is a customer’s debt-to-income ratio. You can calculate this number by dividing your total debt by your total monthly income. The lower the number, the better, in the eyes of lenders. If you have a debt-to-income ratio of 41 or above, consider paying off a credit card or other debt before applying for a loan.

Consider How Much Of A Down Payment You Can Make

Finally, making a larger down payment is likely to get you a better interest rate and smaller payments. A typical mortgage requires at least a 10% down payment. By using an online calculator, you can see how much interest rates and monthly payments go down as you increase your down payment amount.

Final Thoughts

There are many websites that allow you to plug in numbers and calculate how much house you can afford based on your income and expenses. However, each homebuyer needs to decide what affordability really means. By taking time to get your finances in order, checking and improving your credit score, and shopping mortgage rates, you’ll be able to get the best possible home for the amount you choose to spend.