If you’re like most people, your home will be the most expensive thing you ever purchase, by far. One of the first questions people usually ask is “how much house can I afford?”
To be able to answer that question, we will have to look into a number of different factors as explained in the video below.
How much house can I afford video[responsive_video type=’youtube’ hide_related=’1′ hide_logo=’1′ hide_controls=’1′ hide_title=’1′ hide_fullscreen=’1′ autoplay=’0′]https://www.youtube.com/watch?v=AtdormU98SM[/responsive_video]
Here’s an overview of what mortgage bankers will look at when determining how much you will be able to loan
- Housing Ratio – the percentage of your monthly income you will be able to spend on housing costs. Generally speaking you would want this to stay below one third of your monthly gross, 28% to be precise.
- Debt to Income Ratio – your lender doesn’t want you to take on more debt than you can safely repay. 36% seems to be the magic number when it comes to the portion of your income you can spend on paying back debt (housing included)
- Interest Rate – the lower the interest rate the more money you can loan for the same monthly payment. How low your interest rate will be is determined by the current market conditions and by your credit score. So your credit score not only determines if you can get a loan, it also determines how expensive your loan is going to be.
- PMI or Mortgage Insurance – depending on the lender, type of loan and the down payment you’re able to make, you might be required to take out mortgage insurance which adds to your monthly payment and limits how much home you can afford.
- Closing Costs – cost associated with taking out the loan.
- Cost of Home Ownership – utilities, property taxes, hoa dues, insurance, maintenance, …, all add to your expenses at the end of the month
As you can see, the answer to how much house can I afford is not the same as how much you are preapproved for. You will have to budget for future expenses, planned as well as unplanned.
Sounds complicated? We can help you figure out financing and show you exactly how much home you can take on.
As stated above, the Debt-to-Income ratio plays an important part in answering the question “How much house can I afford?” The following video goes into the details:[responsive_video type=’youtube’ hide_related=’1′ hide_logo=’1′ hide_controls=’1′ hide_title=’1′ hide_fullscreen=’1′ autoplay=’0′]https://www.youtube.com/watch?v=WBxAH4369sk[/responsive_video]
Lenders use the debt-to-income ration to determine the risk they will expose themselves to and they try to find a balance that works for them and for you. The DTI is used to make sure you won’t stretch yourself too much with your monthly housing expenses.
As explained before, there are two different DTI-s calculated to take a decision. First, the so called front-end debt to income ratio which looks at all your housing expenses: mortgage principal and interest, property taxes, mortgage insurance premium, homeowners insurance and HOA dues. This should remain below 28% of your monthly income. Second, the back-end ratio which takes into account all your debt obligations like mortgage, car loans, credit card bills, student loan, … This one should be kept below 36%. These of course are just rules of thumb. Please contact me to find out how this works out in your specific situation!
Once you get pre-approval for a loan and you start your house hunt, it is very important not to take on any additional loans! Since you have been approved for a certain debt-to-income ratio, making changes by adding additional debt, may forfeit your qualification and you might end up loosing the house you want.