How Much of a Home can You Afford?
One of the most critical things to determine before you even take a look at a single potential home is: How much of a house can you afford? People across the country have found themselves unexpectedly “house poor” when they buy a property only to realize their income barely lets them make the monthly mortgage payments—much less being able to add to their savings or enjoy the occasional vacation. The house sucks up all their extraneous finances, making it difficult for them to invest or have a more flexible budget.
How Much House Can You Afford?
You must sit down and look at your dependable income in order to calculate how much of a home you can afford. Often the essential details include your household income, the intended down payment you will make on the home, any outstanding debts, and other financial factors. This can involve the loan term, interest rates, property taxes, insurance, HOA fees, and more. You want to have a clear cut number at the end which will give you a pricing range you can then use to narrow down your house-searching prospects.
Fortunately, many lenders and mortgage brokers provide budget calculators that do much of the heavy lifting for you based on your input. Be thorough with this process and don’t rely on guesswork, otherwise you risk putting yourself in a bind by purchasing a house that your budget simply can’t support in the long run.
Another element that can impact house affordability is your debt-to-income ratio (DTI). This is your total minimum monthly debt divided by your gross monthly income. Most mortgage lenders won’t approve a household with a DTI higher than 36% (though there are exceptions for this with FHA loans, which can process DTIs as high as 41%). A 20% DTI is considered excellent, and it’s always wise to pay off debt as much as possible so your regular income can be invested and saved elsewhere.
When evaluating your income, be sure to ask yourself a few key questions. Is your job secure? Are you on an hourly, salary, or commission-based income plan? Can you rely on a stable income source each month? If you have a spouse or co-borrower, is their income reliable as well? Are you expecting any major lifestyle changes (such as having a child) in the near future that might incur extra expenses? Be honest with your situation so you can then find the right house price that fits comfortably in your budget.
