Home ownership is part of the American dream. We all want to have a space to call our own, but in order to avoid disappointment and ensure that we’re on the right path, we have to ask ourselves one vital question: “How much home can I afford?”
Answering that question is easier than you think.
How Much Home Can You Afford?
Before you shop around trying to find the best rates on a mortgage, you need to know how you’ll make the financial side work. In order to figure out what you can afford, you need to look at your situation like a lender.
Your Debt-to-Income Ratio
Lenders look at your debt-to-income ratio to determine whether you will be able to pay your mortgage payments and keep up with your current obligations. They’ll look at your existing debts, including:
- Credit cards
- Car loans
- Student loans
- Personal loans
For the most part, your debt-to-income ratio shouldn’t exceed 36 percent—and that includes your new mortgage. That number is calculated by dividing your monthly debt by your monthly gross income.
Lenders also look at your credit score to determine whether you’re likely to pay back a mortgage loan. Your credit score is based on your history of on-time (and late) payments, your total debt and the length of your credit history. The types of credit you have, as well as how many times you apply for new credit, are also factors that push your credit score up or down.
Your Down Payment
In most situations, you’ll need to come up with between 3.5 percent and 20 percent of the total home loan as a down payment. That down payment doesn’t include closing costs, which are usually between 2 percent and 5 percent of the home’s purchase price.
It’s best if a lender can preapprove you before you start home shopping. Remember, though, just because the bank will lend you a certain amount, you don’t have to accept it all. Because buying a home will usually require you to make payments for 15 or 30 years, keep that in mind while you shop.
Let’s Talk about Your Next Home
Call me at 610-608-3119 or message me online. I’ll be happy to start searching for properties that meet your needs, and I’ll help you get through each step of the process.