Determining How Much House You Can Afford

Determining How Much House You Can Afford

Affordability of a new home depends on funds available for a down payment and your current debt ratios. Start the process by evaluating your total income, debts and other expenses before developing a budget plan. Try using a mortgage calculator to determine your monthly payments, based on interest rates and the loan amount. Once you have determined how much house you can afford, you will be able to pre-qualify for a loan and buy your dream home.

The Budget  

The exciting process of buying a new home starts with the critical step of identifying your budget. A personal budget depends on several factors, including your current debts and your salary. Personal spending and expenses associated with owning a home must be evaluated before purchasing a new property. By evaluating the factors that contribute to the affordability of a home, you will be able to identify your maximum budget and meet the requirements to pre-qualify for a loan.

The Salary

Your salary provides the foundation for your total income and the amount of funds available for a mortgage payment. Begin by evaluating your current salary and monthly income to determine your budget. As a general rule, a loan should never exceed 36 percent of your total monthly salary and income. An easy calculation that determines the affordability of property is determined by the following:

Take into account about 1/3 of your monthly income. If you make $3,000 per month, then you can assess that you will want to handle a mortgage payment of $1,000 per month or less.

Current Debts

The cost of your mortgage will vary based on your debt-to-income ratio. A high-debt ratio determines that you will qualify for a smaller mortgage amount. You want to limit your total debt-to-income ratio to less than 40 percent of your total income. Debts such as credit cards, car payments or other loans impact how many homes you can afford by reducing the amount of funds available to you for the property.
Types of Mortgages

The type of mortgage you secure impacts the overall cost of your home loan. Mortgages are affected by fluctuating interest rates set by the Federal Reserve. Below are the types of mortgages available:

  • A traditional fixed-rate mortgage provides a stable payment plan that you pay off over a set period. You repay a traditional loan over a 30-year period by making monthly payments of a stated amount.
  • Adjustable-rate mortgages offer the lowest current interest rate but the interest increases and decreases with the current rates. As a result, the monthly payments change over time when the interest rates move up or down.
  • A short-term loan, such as a 15-year mortgage, impacts the affordability of property as it impacts monthly payments. A loan with a shorter repayment period usually costs more on a monthly basis, so the affordability of a home depends on the duration of your loan.

The Down Payment

A down payment depends on your financial situation and the funds available for the initial payments. In most cases, you will want to provide a down payment that is roughly 20 percent of a home’s value. There are options to provide larger or smaller down payments before buying a home that you may negotiate with your realtor or seller.