If you're thinking about buying a home, you should ask yourself this question in advance: "How much house I can afford based on my income?" This is an important consideration that will save you time and disappointment looking at homes that may not fit your budget. Additionally, a mortgage you cannot afford will lead to financial difficulty and you may end up losing your dream home.
Start the process of finding an affordable home by reviewing your household budget. Your budget will dictate how much home you can afford. Having this information will narrow your list of homes within your price range and save you time from looking at homes that are beyond your reach financially.
Look at your debt-to-income ratio when you figure how much house you can afford. The debt-to-income ratio is what lending institution uses to determine if you can handle your mortgage debt and establish your loan limit. The debt-to-income ratio includes your personal debt in relation to the amount of money you earn usually based on a certain percentage.
Most mortgage lenders use a 36 percent ratio to determine the ideal debt-to-income ratio. Anything above 36 percent is viewed as risky and may result in higher interest rates or the lending institution may deny the application. Another stipulation when determining affordability is that housing expenses do not exceed 28 percent of your income.
It is important that you do the math when you try to determine how much total debt you are able to carry using a 36 percent ratio. To obtain the 36 percent ratio, multiply your gross income (not the net income) by .36. For example, if you’re gross income is $6,000 times .36 the debt-to-income ratio is $2160 as an allowable monthly debt payments. After you have determined the debt-to-income ratio amount, you will then need to total all your expenses, including variable expenses. So, if your total monthly debt expenses are $800, then, you can only afford a maximum of $1360 mortgage monthly. Take into consideration the other miscellaneous charges that goes with owning a home including private mortgage insurance, homeowners insurance and property taxes to figure out the amount of mortgage you can handle.
Even though most lending institutions use the 36 percent rule, not all locality follows this rule. Some high income areas may use higher debt-to-income ratios. Some lenders may use a ratio up to 45 percent. This amount also may vary depending on the lending institution because mortgage programs under the Federal Housing Authority (FHA) and Veterans Administration may allow higher debt-to-income ratio. The drawback to higher debt-to-income ratio they usually have higher interest rate. Thus, this is something to take into consideration when shopping for an affordable home mortgage and try to put down a sizeable down payment. Putting down a sizeable down payment in some cases reduce your monthly home cost and could also result in lower interest rate.