For most first-time homebuyers, house hunting can be exhilarating. The problem is that if you get caught up in the thrill of the hunt, you might forget to ask yourself the most crucial question of all: How much can you afford?
Even if you have fallen head over heels with a beautiful house because of its impressive kitchen, multiple bathrooms, or a spacious backyard, you need to be smart about your decision. If you can’t afford the monthly mortgage, it’s best to move on to the next property. But, figuring out how much you can pay for doesn’t have to be complicated.
Here are some of the things to consider to help you determine if your prospective home is within your budget:
Mortgage-Payment Ratio
According to most lenders, a home buyer’s mortgage expenses shouldn’t go beyond 28% of their gross monthly income. For example, if you are earning a total of $100,000, your payment shouldn’t be higher than $2,300 for each month ($100,000 x .28 divided by 12).
Debt-to-Income (DTI) Ratio
Debts commonly include housing payments, auto or student loans, and minimum credit card fees. Lenders prefer that a DTI ratio that doesn’t exceed 36%. The lower, the better.
Let’s say you bring in a gross annual income of $100,000. Ideally, you shouldn’t be spending more than $3,000 per month on your total debt payments ($100,000 x .36 divided by 12).
Expenses
If you don’t have a budget yet or merely have a rough estimate, it’s best to have a better understanding of all your spending at this point. You can start by listing all your income sources and sum up these amounts. Then, sort your expenses into two categories: fixed and discretionary.
Fixed expenses are those that need to be settled each month. These are mostly consistent amounts and may include mortgages, utilities, and car payments. The remaining costs are discretionary, in general. These are items that you can get by without. In simpler terms, they are “wants” instead of “needs.”
When identifying both expenses, take into account the average amount you have spent on them for the past three months. That will help you determine if you can afford a monthly payment or whether you’ll still be financially secure when you incur additional expenses in the next few years.
Ultimately, you would ask yourself: “Do I qualify for mortgages?” Well, you might want to discuss it with your broker. They should be able to help you find the best mortgage rates.
If you are a prime borrower candidate, which means having good credit and income, a reputable lender will be happy to offer you the best rates. Generally, some of the things you will need to get approved include a reliable income source, a good debt-to-income ratio, decent credit score, and down payment. The key to making sure you can afford the house you wish to buy is to get your finances in order. It’s not just for the lender’s approval but also for your peace of mind.
