Are you wondering, “How much house can I afford?”?The answer depends on your debt-to-income ratio (DTI), down payment, and other factors.
Being a homeowner isn’t just about choosing a house. You must also ensure that you can afford the monthly mortgage when it knocks on your door. By following the 28/36 rule, you will save money and ensure that you can afford the purchase.
Choose a home with an affordable monthly payment. Besides saving money, you will avoid the awkward position of having to sell every stick of furniture just to make ends meet.
The numbers you’ll need to know
To find out how much house you can afford, it is important to consider several factors, including:
- ⬥ Expenses each month
- ⬥ Budget for your current month
- ⬥ Funds to cover down payment, property taxes, homeowner’s insurance, and other home purchase costs
- ⬥ Ideally, your DTI (debt-to-income) should be below 43%. DTI is the total of your monthly debt payments divided by the amount of your monthly gross income (if you have $2,000 in debt and $5,000 in gross income each month, your DTI is 40% [$2,000/$5,000 = 0.40, and 0.40 x 100 is 40]).
The next step is to look at your monthly income and expenses to determine what kind of mortgage is best for you.
How much mortgage can I afford?
When you consider how much mortgage you can afford, you should be honest and realistic about your monthly expenses, including your debt payments.
It is better to estimate your expenses too high. The last thing you want is to find yourself blindsided by a financial emergency or a sudden expense. Round up when drafting your budget. For example, do you pay an average of $112 for electricity? Round it up to $120. Budgeting this way gives you more flexibility.
Using the 28/36 rule will give you the most accurate forecast. This is a simple calculation that will help you decide how much you can comfortably pay.
As a general rule, spend approximately 28% of your income on housing expenses and no more than 36% on all other debts (such as car loans, credit cards, student loan payments, etc.)
As an example, if you earn $4,000 before taxes, 28 percent of your income is $1,120. This is the total mortgage amount – including taxes, homeowner’s insurance, escrow, and mortgage insurance – that you should aim for. As long as you do not have any other debts, your monthly mortgage payment could reach $1,440, which is 36% of your income.
Keep in mind, however, that even though this is a good general rule, there may be some variations depending on the lender. Keep your DTI under 43% for the best chance of approval.
What’s your credit score?
Mortgage lenders offer the lowest mortgage rates to people with the best credit scores, the most money for a down payment, and the lowest debt-to-income ratio.
The higher your credit score, the better your mortgage rate offers will be. To qualify for a loan, most lenders require a credit score of 580 or higher. A higher credit score leads to a lower interest rate, and a lower interest rate leads to a lower monthly payment.
Increasing your down payment will show lenders you’re serious about the purchase. Additionally, they will view you as a less-risk buyer. The loan-to-value ratio (LTV) may increase because the lender will be more inclined to lend to someone who has more money to put down.
Is there a magic number for buying a house? It’s Your Call
Buying a home should be based on your preferences and your budget – not on keeping up with anyone (Kardashians or otherwise). Each individual needs to evaluate their own financial situation before deciding what kind of mortgage payment is right for them.
You should choose an amount you can afford to pay and can manage comfortably. Even with a low mortgage, you should be able to enjoy going on vacations, ordering in a few nights a week, or knocking one more thing off the bucket list on occasion.
Bottom Line: Honesty is the best policy
So then, the answer to how much house you can afford is an entirely personal decision and shouldn’t be driven by what your real estate agent or lender think you can afford.
Honestly evaluate your financial situation and budget. Knowing how much house you can afford is important if you want to avoid feeling as if you’re barely treading water every month.
Bottom line, if a mortgage is right for you, it shouldn’t be hard to maintain.