Are you thinking of buying a home, but not sure how much you can afford? To determine how much house you can afford, here are some key factors to consider:
A major factor lenders consider is your debt-to-income ratio, which determines how much of your income is needed to pay your debts, such as your mortgage, your credit card payments, and your student loans.
In most instances, your combined debt should be less than 45% of your monthly gross income.
Steps to determine DTI:
- Add up all monthly debts
- Rent, student loans, car payments, credit card payments, etc.
- Divide your monthly debts by your monthly gross income
- Determine whether your DTI is within an acceptable range
- Having a DTI lower than 50% means you have a good chance of getting approved for a mortgage. If you have more than 50%, it’s going to be tougher, so you will need to work on ways to lower your DTI.
You can get a very rough estimate of your affordable home price range by multiplying your annual gross income by 2.5. Although this may vary based on your debt and credit history. Make sure you have the documentation to prove every source of income when you meet with your lender.
Your Credit Score
Your credit score is very important when it comes to getting a mortgage. Lenders usually pull your credit reports from the three main reporting bureaus: Equifax, Experian, and TransUnion. Your credit report is a summary of your credit history and includes your credit card accounts, loans, balances, and payment history.
In addition to checking that you pay your bills on time, lenders will analyze how much of your available credit you actively use, known as credit utilization. Maintaining a credit utilization rate at or below 30 percent boosts your credit score and demonstrates that you manage your debt wisely. Having a credit score range between 650-800 is ideal.
The interest rate on your mortgage is largely determined by your credit rating, and this impacts both the monthly cost and overall cost of owning your own home.
Lenders usually expect between a 10% to 20% down payment, depending on the mortgage you are applying for. Usually, FHA loans require less, so make sure to do your research. Either way, you will need to have the down payment upfront, as lenders will not cover it. Homeowner’s insurance also might be required by your lender.
Closing Costs & Fees
In addition to the cost of your down payment, you’ll also need to consider homeowners’ insurance, taxes, and closing costs. Remember to factor in the expenses and fees you will incur for a home appraisal, a home inspection, and other professional services required to buy a home. However, in some cases, the appraisal can be waived.
Mortgage calculators help you determine how big your mortgage can be, showing you what a monthly payment will look like. You can use our free mortgage calculator to help you determine how much house you can afford!