Determining How Much You Can Afford
If you’re thinking it’s time to take that leap forward and buy a home, the first thing you’re going to need to know is what you can afford. You don’t want to waste your time (or your agent’s, if you’re using one) looking at (and getting attached to) homes that are out of your price range. Rather, have a good idea of what you can afford and set a limit to your big purchase.
To know how much you can afford, you will need to figure out your debt-to-income ratio. This figure is a percentage that’s based on how much personal debt you’re carrying in relation to your income. Lenders will use this in determining how much mortgage debt you’ll be able to handle.
Although in some areas, the debt-to-ratio percentage differs, the general debt-to-income ratio is 36%. Another good guideline to remember is to keep the gross monthly income going towards your housing expense at not more than 28%.
So, using this guideline, how can you find out how much of a monthly house payment you can afford?
- First of all, figure out the total monthly debt you can handle by multiplying your monthly gross income, before taxes and any other expenses, by 36% (or 0.36).
- Next, add up all of your family’s FIXED monthly debt expenses. These are your expenses that are regular and don’t change. They would include your automobile payments, minimum credit card payments, student loans, child support, etc. These would not include varying expenses like groceries – simply your fixed expenses. Once you have this amount, you would subtract it from your total monthly debt that you figured out in the first step.
- The number this leaves you with would be your maximum mortgage payment allowance. It is the most you can afford.
You’ll need to remember that the number you come up with will have to include not only your mortgage payment, but also insurance and property taxes. There are calculators you can use online to help you figure out what you can afford based on that amount.
Of course, this will tell you what you can afford at maximum. This doesn’t necessarily mean that that is how much you should spend. Consider your circumstances, other debts and money spending habits, and realistically how much you’d feel COMFORTABLE spending each month. Create a budget so that you know where your money is going, how you can alter it if you choose, and how much you could truly afford on your new home.
Now that you know your price range…. Good Luck and Happy House Hunting!!
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