Finding out how much home you can afford is one of the most important factors in the home buying process. Finding out how much you can afford will always depend on your personal debt, income, and credit score situation, but with a few quick tips we can set you off in the right direction.
Tip # 1 - Know your Qualifying Income
Knowing the income you can use to qualify is going to go a long way in your mortgage approval process. When it comes to a mortgage the income used to qualify is your gross income (gross income is your income before taxes and deductions) Remember when it comes to income for your mortgage we are looking for income that you can prove through Underwriting, always assume you make less than what you think!
Tip # 2 - Know your debts
First we have to know what debts will be included and what debts will not. Your credit report is a great indicator of what debts will hit you in the loan process, but if you do not have that readily available we can figure this out no problem. For mortgage purposes items such as cable, cell phone, utilities are not considered in your qualifying debts. You will have to include items like credit cards, student loans, car payments, and any other mortgage related debts. Do your best at including all of your debts.
Tip # 3 - Know your Debt to Income ratio (DTI)
Getting an idea of your DTI is going to go a long way in figuring out how much you can afford. To figure out your DTI you will simply take your gross monthly income and divide it by your monthly debts we discussed above, the resulting number will be your current DTI.
Tip # 4 - Know your loan programs max DTI
There are plenty of loan options out there for you the borrower each with their own DTI requirements lets touch on the most popular.
FHA - Range of 50 to 55%
Conventional - Range of 45 - 50%
USDA - Range of 41 - 43%
VA - Range of up to 60% (with many qualifying factors)
Tip # 5 - Speak with a mortgage expert
I cannot stress this one enough! If you want to know what you can actually afford when it comes to buying your home call a mortgage expert, let them dig in to your situation and give you the answers you need.
Now that we know a few tips to help you find out how much you can afford, lets go over an example of what that actually looks like.
Always remember this will vary depending on your loan program. Here comes the fun part, the math part! Let's assume in this example that you are a borrower that makes $3000 a month in gross income, and you want to do a conventional loan, how do we find out how much you can afford? First let's assume in most conventional loans that your max DTI allowed is 45%. If you are making $3000 and have $0 in monthly debt, you would take your income times 45% which gives you $1350. This means conservatively you can afford a monthly mortgage payment including taxes and insurance of $1350 a month. This is a basic example that almost never comes up because lets be honest who doesn't have some debt? Now we can tweak this same exact scenario really quick by adding in debts. Let's say you have $800 in combined debts between credit cards, student loans, and car payments, this now drops your max allowable mortgage payment including taxes and insurance from $1350 down to $550 a month which will significantly cut down your purchase power.
This hopefully give you a better idea of how you can find out how much you can afford monthly for your new home. As always reach out to a local mortgage expert that can help you find the best program for you and your needs.