The home buying process can be exciting as you browse potential houses and find the perfect fit for your family. Before you settle on a house, however, you need to consider carefully how much house you can afford. How much home you can afford largely depends on your income, your debts, and your current financial situation. Keep reading to learn more about the factors that affect how much home you can afford.
Income
When you ask, “How much home can I afford?” the first thing you should consider is your income. Income is one of the most important factors when determining how much home you can afford. In general, the more money you make, the more house you can afford. Mortgage lenders will look at your income and debt-to-income ratio to get an idea of how much you can afford to borrow. They will also look at your employment history and your job stability. Generally, lenders will cap your mortgage at 28 to 36 percent of your monthly income. This includes all housing costs like your mortgage payments, property taxes, and homeowners insurance.
Down Payment
Your down payment also affects how much home you can afford. A larger down payment will reduce the size of your mortgage and result in lower monthly payments. It’s also important to remember that closing costs, or the fees charged by the lender for processing the loan, can add thousands of dollars to your purchase price. So if you’re looking to buy a home in the near future, start saving up!
Debt
Debt is a major factor when considering how much home you can afford. The more debt you have, the less home you can afford. This is because your monthly payments for debts take away from what you can pay for a mortgage. Debts like car payments, credit card payments, personal loans, and student loans will impact how much home you can afford. Lenders will usually look at the total amount of debt payments you’ll be making for the next 10 months.
The amount to owe versus how much money you make is known as your debt-to-income ratio (DTI). Your DTI is a percentage of your monthly debt payments to your monthly gross income. Your DTI will impact how much mortgage you can get. Generally, lenders like to see a DTI of 36 percent or less. If your DTI is higher than 36 percent, you may still be able to get a mortgage, but you may have to pay a higher interest rate, and your mortgage may be for a shorter term. Reducing your debt is the best way to get a bigger mortgage with better rates.
Credit Score
Your credit score is a number that lenders use to measure how risky it would be to loan you money. The higher your score, the less risky you are to lenders, and the more likely you will get a lower interest rate on a loan.
Your credit score is based on several factors detailed in your credit report. Factors include your history of paying bills on time, the amount of debt you have compared to your income, and the age of your credit accounts. Some other things that can affect your score include whether you’ve been late on rent or utility payments or have filed for bankruptcy.
The higher your credit score, the better your chances are of getting a mortgage. While your score isn’t a direct indicator of how much house you can afford, lenders typically want borrowers with scores above 720 to borrow 80 percent of their home’s value. Those with scores in the 600s may only be able to borrow 50 percent. Keep in mind that these are general guidelines and that each lender has its own criteria.
Overall, there are many factors that affect how much home you can afford. The most important factor is your income. Your mortgage lender will look at your gross monthly income to determine how much house you can afford to buy. They will also look at your monthly debts, including car payments, student loans, and credit card debts. The strength of your overall financial situation will determine how much house you can afford.
