How Much House Can I Afford?

How much house can I afford is one of the biggest questions that people have when applying for mortgages. It is crucial that you work out what you can realistically afford before you buy a home. Otherwise, you may end up in financial trouble because the monthly costs are too high. You must know how to calculate a mortgage payment and what your total monthly payments will be.

How much house can I afford on my income?

The 28%/36% debt-to-income rule is a useful benchmark to use. The principal and interest (front-end) should not be more than 28% of your income. Your total debt payments (back-end), mortgage payments, insurance, and property taxes should not be more than 36% of your income. You need to work out an affordable housing budget to avoid financial issues. Calculating your debt to income (DTI) ratio will give you an idea of how much house you can afford. However, some lenders may allow for a higher DTI depending on the situation. You also need to consider the down payment you can afford to save. A higher down payment means lower monthly mortgage repayments, but less money in your bank account. A lower down payment means higher monthly repayments, but more money in your bank account. Also, you should have three month’s or more worth of payments saved before you buy.

 

How much mortgage can I afford?

Your DTI has an impact on the size of mortgage you are eligible for. Banks are reluctant to lend to anybody with a DTI above 43%. It is possible to find options if you get a mortgage quote from multiple lenders. However, it will be more difficult if you cannot reduce your DTI. Interest payments will be higher too. Additionally, you will struggle to manage other financial obligations if you buy a house you can’t afford. Government-backed loan programs tend to have higher DTI limits. The DTI requirements vary depending on the loan program, and may change at any time without notice. Requirements for the major loan programs are as follows:

Fannie Mae and Freddie Mac - 28/36% and up to 45-50% depending on the lender

Jumbo loans - 40-45% - may vary depending on the lender

USDA loans - 29%/41% by automated underwriter to 34%/46% manual underwriter - depending on the situation

FHA loans - 31%/43% and may be up to 50%

VA loans - suggested at no more than 41% percent back end

Although you may be able to get a mortgage with a DTI higher than 36%, that doesn’t mean you can afford it. Consider other financial responsibilities when doing calculations. If you cannot comfortably afford the repayments and other bills, buy a cheaper property.

How much house can I afford with my down payment?

Saving for a large down payment can make your mortgage more affordable. The interest rates might be better and the monthly payments potentially lower. However, you should not empty your savings account to make a down payment. When answering the question how much house can I afford, people look at their total savings and their DTI. But you need to have emergency savings after you buy the property. Additionally, you may need money to renovate the property and put deposits down on utilities. So, you cannot use the entirety of your savings. Calculate three months worth of mortgage payments and deduct that amount. Then, add up the cost of renovations and take that away too. Finally, add up 3-6 months worth of expenses and set this aside as an emergency fund. The remaining amount in your savings is your down payment.

Once you know what down payment you can afford, your DTI, and the size of mortgage you are eligible for, you can use a mortgage quote calculator. This will give you a better answer to how much house I can afford.

How Much House Can I Afford?

How Much House Can I Afford: Is it worth waiting for?

You may be disappointed when answering the question, how much house can I afford? People often find that it is less than they thought. Consider if your finances will be stretched by buying the size of house you want. Holding off gives you a chance to save a larger down payment. As a result, your interest rates and monthly payments may be lower. The term of the mortgage may be shorter too. This means you should be more financially stable in the future. Waiting gives you an opportunity to improve your DTI too. Pay off debts or reconfigure them to reduce your DTI. Negotiating a pay raise or finding alternative income streams helps too. This then gives you more mortgage options, just make sure to be employed for 2 years. Even if you are eligible for a mortgage, that doesn’t mean you should buy a house right away. Consider how much home you can realistically afford and make decisions to protect your financial future. Ask yourself, should I stop renting? Should I buy, should I sell my house?

Sources

https://www.investopedia.com/terms/d/dti.asp

https://www.thebalance.com/is-your-emergency-fund-too-big-4142617

https://www.experian.com/blogs/ask-experian/how-can-you-reduce-your-debt-to-income-ratio/