How Much Home Can You Afford?
How much home can you afford? Having a financial plan will help. This is probably the most important aspect to think about when starting to look for a home. We all have big dreams for what we want in a home but our finances put limits on what we can actually afford. If you can’t pay for a home with cash, then financing the purchase is the only other option. Many people think of a house as a place to live, which it is, but it is also an investment or a means to save money over time. Homes appreciate over time, making them very valuable, so it is essential to maximize your investment through the use of a good financial plan.
Finding the amount of money you can afford to spend each month takes a bit of research. Your mortgage lender will want verification of all of your income, assets, and debts. It is important to go over all of this on your own before you visit your mortgage professional in order to be fully prepared to negotiate. You should ideally come up with a monthly figure that you think you can afford. In the best of situations, the lender might actually approve you for more, but of course it is often in your best interest not to borrow the maximum amount.
Leave some wiggle room in your budget. Unexpected expenses come up, such as housing repairs, medical expenses, accidents of any kind, car problems, children's needs and wants, and numerous planned expenses such as vacations, hobbies, other investments, schooling, etc. When creating your financial plan, having a savings for unexpected expenses is absolutely essential.
Here are some of the main things a lender will be looking at when deciding how much home you can afford:
1) Debt to income ratio (DTI) is used by lenders to determine how much a borrower can afford on a monthly basis. Comparing a person's income to the amount of debt they have to pay on each month gives the lender a good idea of how large a mortgage payment the borrower can safely afford. Current rules for a qualified mortgage state that the mortgage payment plus other debt payments can’t exceed 43% of the borrower’s gross monthly income.
2) Credit score is a reflection of how well a borrower pays their bills. A lower score means that the person is more of a financial risk. Lenders often will not want to loan money to someone with a low credit score, and even if they are willing, will undoubtedly attach it to a higher interest rate in order to reduce the risk on the loan.
3) Down payments in the past have ranged from 3.5% to 20%, but with the new system the down payment will be used to determine whether the borrower meets the 43% Debt to Income ratio. The more one puts down for a down payment, the less they will have to borrow, and therefore are more likely to meet the 43% DTI ratio guidelines.
Careful budgeting and financial planning is essential when looking for a home. Knowing how much you can afford or want to afford will make for a healthy financial situation for the future.