How much Home can you Really Afford?
Most of us have had a crash course over the last year about foreclosures and have seen first hand the many homeowners who found themselves in over their heads in mortgages that they couldn’t afford. So, now the time has come for you to purchase your first home and the question that seems to be looming in your head is: how much house can I afford?
There are many factors that you should consider when purchasing a home, and the first of which is your budget. Although your lender will ultimately inform you about how much home you can afford, many home buyers want to figure this amount out before they head to the lender, and rightfully so.
Here are a few factors that you should consider when determining how much home you can afford:
- Income – Your income – in particular, your annual income – will play a big role when determining how much home you can afford. A good rule of thumb is to multiply your annual gross income by two and a half to find your home price limit. Although this number, of course, is simply a starting point, it can provide you with a good deal of insight when considering how much home you can afford.
- Debt-to-Income Ratio – Many lenders, when determining how much home you can afford, will take into account your debt-to-income ratio, which essentially is the amount of debt you have versus the amount of your income. Student loans, credit card debt and car loans are just a few of the things that can raise your debt-to-income ratio, thereby lowering your overall home loan approval number. A good rule of thumb is to pay down as much debt as possible (and not to accrue any new debt) before applying for a home loan.
- Housing Expense Ratio – Most lenders will make an assumption that your monthly housing expenses should not exceed 25 to 30 percent of your gross monthly income.
- Other Factors – Other factors that you may want to consider when deciding how much home you can afford are interest rates, closing costs and home loan types. For example, just a percentage point either way on a $200,000 loan can mean hundreds of dollars a month in interest fees.
Contact Us or call 469-358-9203 and we can discuss Financing options.