The decision to buy a new home is exciting but may also be fraught with issues. One of the most challenging issues a potential homeowner must worry about is how much house they can afford. It is important to understand, for most people, their home is the most significant financial investment they will make. After all, you will be paying a mortgage, paying taxes, and be required to maintain insurance for many years in the future. That means finding a home you can afford is crucial to your long-term financial health.
Before determining the final value of the home you can afford to buy, you will have to first compile a comprehensive list of your current financial status. This means taking everything into consideration including your gross monthly income, your current debts including car payments, insurance payments, credit card debts, and where applicable, student loan payments and how much money you have saved for your home down payment.
While not ground in stone, in most cases, you will want your debt, including your mortgage payment, to remain at or below 36 percent of your monthly income. Keep in mind, your mortgage debt will be a combination of principal, interest, taxes, insurance and if you are putting less than 20 percent down, private mortgage insurance.
There are some things you should be aware of when doing these calculations. For example, if you currently have an auto loan that will be paid off in 24 months or less, the lender may allow the payment to be excluded from your debt ratio. Additionally, credit cards which are open but have no balance may be counted against you in some instances, so it is a good idea to discuss them with your mortgage lender, particularly if you have not used the cards regularly.
Another factor which should be carefully considered is the amount of down payment you are able to make on a home. In most cases, the more down payment you can afford, the more house you can afford. This can be a double-edged sword because the more expensive the home, the higher the cost of insurance and taxes, and if your down payment is less than 20 percent of your purchase price, you may also be required to maintain private mortgage insurance (PMI) as part of your monthly mortgage payment.
Another factor will be the terms of your mortgage. For example, a 15-year loan at six percent and a 30-year loan at six percent are very different in terms of payments. A 15-year, $300,000 mortgage at six percent will cost approximately $2,532 a month without insurance or taxes and a 30-year mortgage at the same rate will be approximately $1,799 without insurance or taxes. Clearly this is a significant decision which will bear heavily on your final decision.
One of the most important factors you should be reviewing when determining what price range you should be targeting when shopping for a home is the loan programs you may be eligible for. Some borrowers will qualify for VA or FHA backed loans which could mean they will qualify for specific programs allowing higher debt-to-income ratios, lower down payments, and more. Your mortgage lender can provide you with a better understanding of which home buyer programs you may be eligible for.
If you are ready to start the home buying process, let Lend Smart Mortgage help. As a Minnesota-based mortgage lender, have helped thousands of people across the area attain their dream of home ownership. We can help you reach your goal of owning your home, and we are happy to work with you to get a pre-approval so you know just how much home you can afford before you begin shopping.
We are a direct lender and a broker who will work one on one with you to exceed your expectations. If we don’t have a product that makes the most sense for you, we’ll find the lender that does. We’ll make sure you have the best loan at the best price. Choose Lend Smart- it’s the smarter way of doing business.