Mansion or Yurt: What Can You Afford?
Dreaming of owning a home and wondering how much you can afford? You're not alone. It's one of the most important questions you'll need to answer before you can begin house hunting – and many factors, aside from your income and car payment, come into play.
So, what is your number?
To determine how much you can afford, here are two important guidelines used by most lenders you'll need to consider:
- The Housing Expense Ratio = Your mortgage payment (principal, interest, taxes and mortgage insurance) needs to be less than 28 percent of your monthly gross income.
- The Debt-to-Income Ratio = Your combined debt (credit cards, student loans, alimony, child support, car loans and housing expenses) must be less than 30-40 percent of your monthly gross income.
In addition to these key ratios, all of the following will play a role:
- Your income. You can get a very rough estimate of your affordable home price range by multiplying your annual gross income by 2.5 (this, of course, varies depending on current interest rates, your debt and credit history).
- Your credit. Generally speaking, the better your credit, the lower the cost of obtaining credit and the greater your financing options.
- Current mortgage rates. Although mortgage rates are rising, they're still historically low – below 5 percent – making homeownership affordable for many.
- Your downpayment. Plan to make a downpayment of at least 5 or 10 percent. If you are able to put down 20 percent or more, you avoid having to pay private mortgage insurance (PMI), reducing your monthly mortgage payment.
- The type of home. The type of home you buy influences the mortgage rate for your loan. For example, rates for condos are typically higher and you’ll also have to budget for monthly condo fees.
- Fees and closing costs. Remember to factor in the expenses and fees you will incur for a home appraisal, a home inspection, and other professional services required to buy a home.
Visit our mortgage calculators, including How Much You Can Afford, to help you do the math.
And reach out to your lender to get the full picture of what you can afford.