Ah, the quest to buy a house. What fun to tour open houses, watch HGTV, and dream of the palace that will surely be yours as you start looking into buying a home. But then reality sets in: Who wants to fall in love with a home that’s out of their price range? That’s why as a home buyer, you should first figure out how much home you can afford.
At Newfi, we recommend that home buyers find out their “ideal number” before they ever even start their home buying journey. And that’s because your dream home can quickly turn into a nightmare if the payments are keeping you up at night.
In fact, the right question is not just “How much home can I afford?” but “How much home should I afford?”
Here are five questions to help you figure out how much home you can afford when home shopping:
- What is my down payment situation?
- What interest rate will I qualify for, based on my credit?
- What is my debt-to-income ratio?
- How much money do I want available for other uses?
- How long will I be in the house?
Let’s look at each one a little more closely.
1) How much down payment do I have?
The more you put down when buying a home, the lower your payment will be, month after month. However, not everyone can save the 20% down that used to be the standard. The good news is that there are a wide variety of mortgage loan programs that don’t require 20%. Your Newfi Mortgage Advisor can walk you through the options to find a product with a down payment requirement that’s right for you.
2) What’s my credit like?
Your credit score will affect your eventual payment, since the interest rate you will qualify for when you buy a home is tied to your credit score — the higher your score, the lower (less expensive) your rate.
However, don’t worry: A credit blemish is not likely to lock you out of a mortgage. Our Mortgage Advisors are experienced in helping borrowers with less-than-perfect credit, and we can help find an affordable solution for you when buying a home.
3) What’s my debt-to-income ratio?
This is the key number that will provide the answer to how much home can I afford.
Many people assume that their monthly mortgage payment is based solely on their income. And that would be true, if you had no other debts — but that is rarely the case.
There are a wide variety of possible “debts” you should take into account, such as:
- Car payments
- School loan payments
- Credit card payments
- Alimony or child support
Your Mortgage Advisor can help you identify what factors you should consider as you build an accurate picture of your debts.
Then, to figure out your debt-to-income ratio, you’ll take the total of all your monthly debts, divided by your gross monthly income to determine how much of a loan you will be approved for.
The ideal ratio of debt-to-income, including your mortgage payment, is below 36%. The top debt-to-income ratio you should have is 43%, and if you prefer to have more “fun money,” you may aim for closer to 20%.
4) What is my lifestyle like?
Here’s the complicating factor in going with a straight debt-to-income ratio in determining how much home you can afford. Some home buyers are perfectly happy pouring all their disposable income into the payment to buy a home that’s at the top end of their budget, perhaps because it’s worth it to them to be in a certain neighborhood or school district.
But others still want to have cash left over after their mortgage payment to dine out or take a vacation, or maybe they are aggressively saving for college or retirement, or want to apply more money to their outstanding debts. And don’t overlook potential home improvement projects and costs for necessary maintenance, which can add up fast.
The answer is different for every person, but it’s important to be honest with yourself prior to being saddled with a mortgage payment that doesn’t leave sufficient funds left over for the lifestyle you prefer.
5) How long do I intend to stay in the house?
While we all know that life changes can happen, your ideal mortgage payment can be vary based on your timeline for owning the property. For example, if you are certain you don’t intend to be in the house longer than seven years, you might want to look into an adjustable rate mortgage, or ARM, which can often have a lower interest rate (and thus a lower monthly payment) than a conventional loan for the first several years, depending on the product you choose. In other words, an ARM can be an affordable choice for someone who plans to be in their home a short time.
Want to know with more certainty how much home you can afford? That’s what we’re here for. If you’re planning to buy a home, call us today at (888) 316-3934 or use our contact form. We’ll get you a personalized mortgage rate and review all the mortgage options that are specifically tailored to your situation to make sure you get the mortgage payment that’s appropriate for your lifestyle.