How Much House Can I Afford?
How much house can I afford? This is often one of the first questions that potential home buyers ask before starting their home search. Asking your lender this question and applying for mortgage pre-approval is likely the best way to fully understand the flexibility of your home buying budget.
While you may know how much your annual salary is, it’s not common knowledge as to how your salary translates to home buying potential. Knowing how much house you can afford to buy can be complicated. There are a number of factors to consider when analyzing “how much house can I afford?”
Let’s take a detailed look at the variables in your potential home buying budget:
Analyzing Income and Debts
Qualifying for a mortgage, means that you must show that you are financially prepared to repay the loan over time. Taking a look at your income and current debt obligations is the first step to calculating how much house you can afford.
Your monthly income must be steady and stable to qualify for traditional mortgage programs. Federal mortgage guidelines ensure that your mortgage payment is affordable, which reduces the likelihood of loan defaults. The debt to income ratio, or DTI, has a maximum loan limit of 41% to 50% debt repayment obligations compared to your gross monthly income, depending on the mortgage program you choose. (Gross income is the amount of earnings before taxes.)
Considering Other Debts:
If you have other monthly debt payment obligations this can impact your home buying budget. Student loans, credit card debt, auto loans, and other types of financing that require a monthly payment all impact your debit to income ratio.
For a conventional mortgage loan your total monthly debt payment obligations cannot exceed 45% of your gross monthly income. This will include your future mortgage payment and current debt obligations.
For example: If your gross monthly income is $5000, your monthly debt/mortgage repayment cannot exceed $2,250.
Affording Monthly Mortgage Payments
Your mortgage payment is applied to different purposes during the loan repayment term. The loan term, interest rate, property taxes, home insurance, and homeowners association can all play a role in determining how much house you can afford.
A traditional mortgage for a first time home buyer has a 30 year loan repayment term. However If you want to pay your mortgage back quicker, you can choose a 25, 20, or 15 year term for your mortgage. A shorter term means higher monthly mortgage payments, but it can also save you money in the interest you pay over time.
The interest rate on your mortgage loan will impact your monthly mortgage payment. Consider whether you would benefit from paying points at closing to lower your interest rate.
State property taxes vary based on where the home is located. Urban areas with growth, more schools, and need for maintenance, often have higher taxes than rural areas. How much house you can afford can be very different based on location and the tax rate. A 3 bedroom – 2 bathroom house in a less populated area may cost you thousands of dollars less in property tax each year, than a house of the same size in a big city.
Your annual state property taxes, homeowners insurance, and HOA dues can be payed from the escrow account that is built into the structure of your mortgage. Learn more about how an escrow account works in our previous blog article.
You homeowner’s insurance can also be impacted by the location of the property you are purchasing. Buying a property near a body of water may require additional insurance coverage. Be aware that properties that require flood zone insurance or other hazard insurance on your homeowner policy can make a difference in how much house you can afford.
While you are looking to buy a home, pay attention to the cost of the homeowner’s association dues. Many pre-planned communities, town homes, and condominiums have either monthly or annual HOA dues. Neighborhoods with an HOA can have benefits that protect your property value and a number of nice amenities for you and your family. However, the required HOA dues will impact your overall home buying budget.
Making a Down Payment
You not only need to be able to afford the monthly payment to qualify for a mortgage, but you will also need to show that you have the funds for the down payment and closing costs. Plan to save at least 5% to 10% of the total purchase price of the home for the down payment. While there are mortgage options that require a lower down payment, having the savings is a good financial strategy.
Closing costs are generally 2% to 5% of the purchase price of the home. Saving this amount should cover the title fees and other regular closing costs.
Read more about creating a “Down Payment Savings Plan” here.
We are here to help you find answers to your mortgage questions. If you would like to know more about the information in this article or have other mortgage related questions, one of our licensed mortgage consultants would be happy to talk with you.
We would be honored to be the mortgage experts on your team to help you buy your home. It is fast and FREE to get pre approved with TexasLending.com.