"How much house can I afford" is a pertinent question that homebuyers often ask themselves. Have you asked yourself this question and are you still thinking about the answer? This article can clear the doubts for you.
There is nothing called an "ideal home". The answer to the question how much house can I afford would differ from one borrower to another since every borrower is unique. Home affordability is dependent on a variety of factors like your income, location, savings, individual preferences and most significantly, the home buying plan you have prepared.
When you're thinking about buying a home, you must try to make a down payment of 20% or over. This would ensure that your monthly mortgage payments remain within your means. Your monthly mortgage payment must not be more than 25% of your monthly income.
Debt to income ratio - An important ratio
The recent mortgage market dilemma has forced the lenders to make their lending guidelines stricter. They suffered huge losses in the real estate market. They're not lending money to people for buying something that they simply can't afford. While assessing home affordability of a borrower, the banks or lenders use the debt to income ratio.
According to the National Association of Realtors home affordability index, if you can make a down payment of 20%, 25% of your monthly income should suffice for your real estate taxes, mortgage insurance payments. However, the banks are somewhat more liberal. Most banks lend money at reasonable rates if your monthly housing expenses are approximately 28% of your monthly take home pay. This ratio is known as the housing expense to income ratio or front ratio.
Nevertheless, banks and lenders also take into consideration other debts like car payments, credit card debts, student loans, alimony and child support. When these debts are summed up with your housing expenses, they prefer a debt to income ratio that's not higher than 36% of your monthly income. This is also known as the long term debt to income ratio or back ratio.
You can determine your home affordability by using the two ratios mentioned above. You can also use a home affordability calculator. By entering basic inputs like your income, debts and the amount of down payment you want to make, you can find out the amount of monthly loan payment and the total amount of mortgage you can afford. This tool is easy to use and helps you make important financial decisions.
There is nothing called an "ideal home". The answer to the question how much house can I afford would differ from one borrower to another since every borrower is unique. Home affordability is dependent on a variety of factors like your income, location, savings, individual preferences and most significantly, the home buying plan you have prepared.
When you're thinking about buying a home, you must try to make a down payment of 20% or over. This would ensure that your monthly mortgage payments remain within your means. Your monthly mortgage payment must not be more than 25% of your monthly income.
Debt to income ratio - An important ratio
The recent mortgage market dilemma has forced the lenders to make their lending guidelines stricter. They suffered huge losses in the real estate market. They're not lending money to people for buying something that they simply can't afford. While assessing home affordability of a borrower, the banks or lenders use the debt to income ratio.
According to the National Association of Realtors home affordability index, if you can make a down payment of 20%, 25% of your monthly income should suffice for your real estate taxes, mortgage insurance payments. However, the banks are somewhat more liberal. Most banks lend money at reasonable rates if your monthly housing expenses are approximately 28% of your monthly take home pay. This ratio is known as the housing expense to income ratio or front ratio.
Nevertheless, banks and lenders also take into consideration other debts like car payments, credit card debts, student loans, alimony and child support. When these debts are summed up with your housing expenses, they prefer a debt to income ratio that's not higher than 36% of your monthly income. This is also known as the long term debt to income ratio or back ratio.
You can determine your home affordability by using the two ratios mentioned above. You can also use a home affordability calculator. By entering basic inputs like your income, debts and the amount of down payment you want to make, you can find out the amount of monthly loan payment and the total amount of mortgage you can afford. This tool is easy to use and helps you make important financial decisions.
