How much home can I afford?
Everyone’s financial situation is different and when it comes to buying a house, determining how much home you can afford requires some analysis. Many recommend the 28%/36% rule which says that you shouldn’t spend more than 28% of your monthly income on home-related costs and 36% on total debts such as your mortgage.
For example, if you earn $5,000 a month and have $1,000 in existing debt payments (cars, credit cards, etc.), you will want your monthly mortgage payment to not exceed $800. Here’s the calculation: ($5,000 x 36%) – $1000 = $800. Armed with this number, now you can start to generally understand what kind of mortgage payment will work best for you.
While this might serve as a good starting point, your particular situation is unique. The best thing you can do is speak with a mortgage professional to get a better understanding on how much house you can afford. In addition, take advantage of a mortgage calculator (amortization calculator) to get some ballpark figures for your situation.
4 Factors That Impact Home Affordability
- Your Income: Your income is a key factor in determining what is or is not affordable for your financial situation. Additionally, self-employed income introduces other complications in the process. Make sure to speak with a mortgage professional to understand your particular needs as it relates to your income.
- Saved Cash: You’re ability to bring funds to the closing table can drastically impact affordability. With more reserves available for a down payment and to cover closing costs, you start to have more options when it comes to what you can afford to buy.
- Debts & Expenses: Your debts are a critical piece of the affordability calculation. Mortgage experts will look at your monthly obligations as it relates to credit cards, car payments, student loans, etc. Your ability to answer the “how much home can I afford” question is significantly impacted by debts.
- Your Credit Score: Your credit offers a glimpse into your qualifications as a borrower. Poor credit candidates present a higher risk for lenders because they don’t offer lenders a strong enough track record of paying off debts. Making sure your credit score is healthy will drastically improve your ability to get a loan and at the best rate possible.
Debt-to-Income (DTI) & Home Affordability
The debt-to-income (DTI) calculation is one of the most important calculations your mortgage company will utilize when looking at your financial situation and determining how much home you can afford. Simply put, your DTI ratio is all of your monthly debt payments divided by your gross monthly income.
This figure helps lenders determine your ability to manage monthly payments at a particular rate. For many, the highest ratio you can have and still get a qualified mortgage is 43%. There are exceptions to this rule, but that is something that your lender can walk you through if needed.
Your ability to afford a home will be driven by your ability to repay a mortgage. In many ways, the amount of home you can afford is really a function of the loan you can qualify for. This is why it is critical to work with a trusted mortgage company to find out what will work for your situation.
The Takeaway on Home Affordability
At the very least, you should speak with a mortgage expert to find out what you can afford to buy. While you can run some of the numbers yourself, your loan officer will be able to capture a more complete view of your situation. From there you can start the mortgage preapproval process and be on your way to shopping for your next home! If you have any questions, feel free to reach out to one of our mortgage advisors.