How Much House can I Afford

How Much House Can I Afford Base On My Income

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Do you want to own a home or rent one?

The big question is How Much House Can I Afford? ….. Yeah, it requires calculation and balancing of things to avoid you escape debt and live your dream life. This article will help you answer this question. Don’t forget to read carefully.

 

After making the decision that you want to buy a house, the next thing you should do is determining how much you can spend in reality. The amount of house you can afford depends on many factors including your income, credit score, and lifestyle. Buying a house can be a complex process, so if you know how much you can actually afford to spend on a home before you start shopping, there will be less stress throughout the process.

 

Buying your first home is one of the most important and exciting financial milestones of your life. But before you start the search with a realtor, you need to have a good sense of a realistic budget. Just how much house can I afford?

 

How To Determine How Much House Can I Afford

 

Asking yourself this question will bring many thoughts to your mind. On doubt; it is a big question, only you will provide the answer. This page contains a guide for you to answer the question. There are things to consider before stating the cost of the house you can afford; there are:

 

How Much House can I Afford

 

  • The rules of home affordability

 

Mortgage lenders use something called qualification ratios to determine how much they will lend to a borrower. Although each lender uses slightly different ratios, most are within the same range. Some lenders will lend a bit more, some a bit less. We have taken average qualification ratios to come up with our three rules of home affordability.

First, you need to determine how much of your monthly income you can spend on housing. You need to remember to leave yourself a reasonable cushion for savings, insurance, taxes, and other expenses.

One good way to begin is by analyzing your debt-to-income (DTI) ratio. Your DTI is a numerical representation of how much you spend on recurring debts per month. Lenders look at your DTI when they consider your mortgage application to determine if you can afford to take on more debt. Your DTI can also help you determine if you should be renting or buying.

 

  • Your maximum mortgage payment

 

The golden rule in determining how much home you can afford is that your monthly mortgage payment should not exceed 28% of your gross monthly income (your income before taxes are taken out). For example, if you and your spouse have a combined annual income of $80,000, your mortgage payment should not exceed $1,866.

Calculating your DTI is relatively simple. You only need to include regular and recurring expenses in your debt calculation.

After you calculate your total monthly debts, divide your debt obligation by your total pretax household income. Divide by 100 and you have your DTI as a percentage.

As an example, let’s say your total monthly debts equal $2,000 and your monthly household income is $5,000 before taxes. To find your DTI, all you need to do is divide $2,000 by $5,000. In this example, your DTI is 0.40, or 40%.

 

  • Estimate Your Monthly Mortgage Payments

 

Estimate your income

Banks typically base your mortgage approval amount on your gross monthly income, which is your total compensation before taxes or other deductions. This number will give you an understanding of how much money you have available each month to cover all of your expenses. How you calculate your gross monthly income depends on how you’re paid:

 

Annual Salary

If you receive an annual salary, divide it by 12 to estimate your gross monthly income for that job. For example, if your annual salary is $75,000 per year, your gross monthly income would be $6,250 ($75,000 divided by 12).

 

Hourly Wage

If you’re paid by the hour, then it’s helpful to start with the average number of hours you work each week since your schedule may vary. You can then multiply that number by your hourly rate to get an estimate of your gross income each week. Simply multiply that number by the number of weeks you work each year to estimate your gross annual income. Finally, take that amount and divide it by 12 to estimate your gross monthly income.

 

Understanding How Much House Can I Afford

 

Understanding how much house can I afford involves some careful planning.

When you think about how much house can I afford you need to understand some basic planning like;

 

How Much House can I Afford

 

  • Not having Irregular income

If you have irregular income, for example, you’re paid on commission, receive bonuses or occasionally work overtime estimating your income can be a little more tricky. It’s helpful to look at a historical track record for this type of income as well as an economic or industry outlook.

Once you establish the likelihood of your bonuses and commissions for the next year, these amounts can be included in your estimated gross monthly income. Add up the extra amounts of income you earn throughout the year and divide it by 12. Add this amount to your gross monthly income.

 

  • Know Your maximum monthly debt payments

When planning, your total debt payments, including your housing payment, your auto loan or student loan payments, and minimum credit card payments should not exceed 40% of your gross monthly income.

Now that you have a rough idea of how much you can afford to spend monthly for a mortgage premium, it’s time to figure out a budget for home shopping. To calculate your ideal home price, you must consider two factors that heavily influence how much you’ll pay for your loan: term and interest.

 

  • Keeping a reserve

No matter what your situation, a good rule of thumb is to have three months of your housing payments, plus your regular monthly expenses, in reserve. This will give you a buffer in case of an unexpected event, NerdWallet recommends.

 

 

Understanding Interest Rate And Payments

 

If you ask how much house can I afford know that Interest payments go to your lender in exchange for your loan. The specific interest rate you’ll pay depends on a number of factors, including your credit score, your loan structure, and current market conditions. Even a difference of a tenth of a point in interest can mean paying thousands more for your loan over time, so it’s worth the effort to shop around to get the best rate possible.

 

Learn about your mortgage options

Homebuyers can typically choose from two main types of mortgages:

  • A conventional loan that is guaranteed by a private lender or banking institution
  • A government-backed loan
  • When choosing a loan, you’ll want to explore the types of rates and the terms for each option. There may also be a mortgage option based on your personal circumstances, like if you’re a veteran or first-time homebuyer.

 

Conventional loan

A conventional loan is a mortgage offered by private lenders. Many lenders require a FICO score of 620 or above to approve a conventional loan. You can choose from terms that include 10, 15, 20 or 30 years. Conventional loans require larger down payments than government-backed loans, ranging from 5 percent to 20 percent, depending on the lender and the borrower’s credit history.

If you can make a large down payment and have a credit score that represents a lower debt-to-income ratio, a conventional loan may be a great choice because it eliminates some of the extra fees that can come with a government-backed loan.

 

Government-backed loan

Buyers can also apply for three types of government-backed mortgages. FHA loans were established to make home-buying more affordable, especially for first-time buyers.

 

Property Taxes

No matter where you live when browsing on how much a house can I afford you must pay property taxes. Property taxes go to your local government to fund things like public schools, libraries, and emergency services. Your property tax rate will vary depending on where you live. If you’re shopping for how much house can I afford a home in a specific county, know the effective tax rate to estimate your liability.

 

Closing Costs

Closing costs are one-time expenses you pay when you close on your loan. Closing costs include things like appraisals, title insurance, and attorney fees. Expect to pay between 3% – 6% of the total purchase price of how much house can I afford a home in closing costs.

It’s also important to keep in mind that variable expenses like utilities, maintenance, and repairs will also come out of your budget when you own your home.

Lenders are required to outline and disclose your total closing costs before closing. These are common closing costs for homebuyers, according to Realtor.com:

Appraisal fee: Required by lenders, this nonrefundable fee goes to a licensed appraiser who provides a market value for the home. ($450 to $650)

Closing fee: A fee paid to a title company representative who supervises the transfer of title at closing. ($300 to $600)

Credit report fee: The fee charged to pull your credit report. ($25 to $50)

Inspection: This isn’t required for a loan, but it’s recommended by most realtors to give insights into potential problems with the property before purchase. ($450 to $500)

Survey: The cost to survey your property before you can get a loan, which most states require. Call your state or local realtor association to confirm the requirements in your area. ($350 to $500)

 

 

Compare With Your Budget to Know How Much House Can I Afford

 

Now that you know the full cost of homeownership and you have a rough idea of how much you can afford to spend a month, take a look at your household expenses. How does your calculated mortgage premium fit into your budget? When you factor in expenses like homeowners insurance and property taxes, how does your DTI change?

Before you commit to a mortgage, you need to be absolutely sure you can make your premium, insurance, and tax payments.

If you don’t already have a household budget, track your expenses for a few months and see where your money is going. Look at the amount of money you have coming in and compare it to what you currently pay for housing with the full costs of homeownership. As a general rule, your total homeownership expenses shouldn’t take up more than 33% of your total monthly budget.

If your anticipated homeownership expenses take up more than 33% of your monthly budget, you’ll need to adjust your mortgage choice. Taking a longer mortgage term and buying a less expensive home are two ways you can lower your monthly payment.

 

The Bottom Line On How Much You Should Spend

 

The amount you can afford to spend on a home depends on a wide array of factors. First, you should calculate your DTI by comparing your current debts to your income. This will allow you to anticipate how much you can afford to take out in a loan.

 

Once you have a rough idea of how much home you can afford, compare it to your current household budget. If you don’t have a budget, track your household spending for a few months. Look at how a mortgage payment would affect your savings, income, and DTI. If it seems reasonable, you might be ready to get a loan. If it doesn’t seem reasonable, you should reconsider how much home you can really afford.

 

Remember, everyone’s financial situation is different, and it’s best to speak with a licensed financial expert or advisor before making any major financial decisions.

 

Get pre-approved for a mortgage

Buyers can be pre-qualified or pre-approved. A pre-qualification gives you an estimate of how much you can afford, while a pre-approval means the lender has checked your credit, verified your documentation, and approved you for a specific loan amount, according to Investopedia.

 

To prepare for the pre-approval process, gather the following documents:

  • W-2 statements, pay stubs, or tax returns from the past two years
  • Bank and investment account statements
  • Driver’s license and Social Security number
  • Lenders will pull your credit report and base their pre-approval on your credit score and debt-to-income ratio. They will likely call your company to verify employment.

You may want to review your credit report before you apply for a mortgage to check for mistakes.

 

If you have recently changed jobs, they may contact your previous employer. Self-employed borrowers will need to provide additional paperwork on their business and income

 

Job Security and Career Path

 

If you lost your job, how quickly could you find another one? Consider how secure your income is when deciding how much to spend on a house.

If there’s a chance you’re going to change careers, anticipate what your new income would likely be in your new profession.

 

If you plan to have children and one spouse will become a stay-at-home parent, you’ll want to adjust your budget accordingly.

Also, if you plan to take time off for a sabbatical, be sure you have enough in savings to cover your mortgage payments during your time away.

 

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CONCLUSION

 

Purchasing a house is one of the biggest dreams and a big achievement many people get in their lifetime. There are a lot of factors that influence how much house you can afford so it is generally a good idea to evaluate your finances and the costs of buying before searching for homes.

It is also most important to learn about the lending process, the mortgage’s as well as the price of homeownership so you can forward your plans. Since it is a big achievement don’t be shy to ask lots of questions so as to go in with all the information you need. We hope you have provided all you need to know about How Much House can I Afford.

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