Buyers Guide to Purchasing a Home

Home Much Can You Afford for a Home?

We know there's not just one answer to this question, but this will help guide you figure out how much you can afford for a home.


Introduction
If you're in the market for a new home, you've probably been asking yourself how much house can I afford? The answer to that question will depend on many factors. In this blog post we'll explore those factors so that you can get a rough estimate of what your budget might be.
 
Learn what the key factors are in determining how much house you can afford.
When determining how much house you can afford, there are several key factors to consider. Here is a list of the most important ones:
 
  • Down payment
  • Debt-to-income ratio (your monthly housing expenses are not more than 28% of your gross income)
  • Mortgage type (fixed vs adjustable rate) and loan term (30 years vs 15 years)
  • Credit score
  • Mortgage insurance if you have less than 20% down payment or a high debt-to-income ratio
With all these criteria in mind, how does one go about calculating how much to spend on a new home?
 
Down payment
The down payment is typically 20% of the purchase price and can be paid in cash or by taking out a loan. If you choose to take out a loan, it's often called an "80-10-10" mortgage—in other words, you're putting down 10%, the bank loans you 80% of the purchase price, and you pay off that 80% in monthly payments. Your monthly payment will be made up of three parts: principal (what you owe on your mortgage), interest (the amount charged each month to use their money), and property taxes (if they apply).
The down payment is used for closing costs like title searches or appraisals; repairs; tax bills; and inspections. If a home needs renovations before moving in, this money will cover that too—just make sure to have enough left over for those items as well!
 
Debt to income
To determine how much house you can afford, lenders will look at your debt-to-income ratio. This is the percentage of your monthly payment that goes toward paying off debts (like credit cards) and housing expenses. If your debt-to-income ratio is too high, you may not qualify for a loan or be able to get a mortgage with a lower interest rate.
 
The general rule of thumb is that your total monthly housing expense should be no more than 28% of your gross monthly income (take-home pay after taxes). To calculate this number: take the amount you make per month and divide it by 12; then add in any other debt payments such as student loans, car loans or medical bills; then subtract any tax deductions like 401k contributions or healthcare premiums; finally divide this figure by 4—this will give you an estimated monthly housing cost based on average home prices in your area.
 
Mortgage type
There are two main types of mortgages: fixed and variable. A fixed-rate mortgage will have the same interest rate for the entire term of your loan, which is usually between 15 and 30 years. That means if you close on a $200,000 home with a 30-year fixed rate at 4%, your monthly payment will remain at $1,370 (including taxes and insurance) until you pay off your home in full.
 
Variable-rate mortgages are more common now than they used to be due to changes in the market over time. These loans can be adjusted up or down based on market conditions, which makes them easier for borrowers who want flexibility in their monthly payments but can also make these loans riskier than their fixed counterparts if rates increase dramatically over time.
 
Credit score
Your credit score is a number between 300 and 850—the higher the better. It's based on your credit history, which can be good or bad. The higher your credit score, the more likely you are to pay back loans on time and not default.
Your credit score can help or hurt how much house you can afford:
 
  • If you have a good track record of paying off debts, lenders will trust that you'll repay them as well. They may offer lower interest rates or smaller down payments when they see this kind of history in your personal report.
  • If you've had trouble paying off debts in the past (or if there's just not enough information available), lenders might consider upping their interest rates or requiring larger down payments before they give out any loans at all.
Mortgage Insurance
Mortgage insurance, also known as private mortgage insurance (PMI) or lender's hazard insurance (LHI), is a type of insurance that protects the lender against loss in case of default by the borrower. Mortgage insurance is required when you put less than 20% down on your home purchase. It usually lasts for one year after closing and then drops off automatically if you continue paying your monthly payments on time throughout that period.
 
Mortgage insurance can be paid for in several ways:
·        Monthly premium that goes toward your principal balance (this method is called “principal-only”)
·        Lump sum payment at closing that reduces your loan balance (“no-cost” or not)
 
Conclusion
Congratulations on taking the first step to finding the right home for you! You now have all the information you need to start your search and find the perfect place to call home.
 
 

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