(ThePennyWatcher.com) – One of the most important questions when interested in buying a house is…how much house can you afford?
The good news is that calculating what you can afford doesn’t have to be hard. Figuring out the right price tag for your dream home simply requires some basic math.
You will have to consider a variety of factors like your total income, expenses, and mortgage interest rates.
Learning these tips will give you a better understanding of financing options available so that next time someone asks “how much house can I afford?, you’ll be able to know exactly what price range you fall in so you can start looking.
Your Monthly Income & Debts
To start, you will need to compile all your tax documents that show how much gross income you make for the year. Either as an individual, or combined with your significant other. Wife, husband, partner, etc.
This figure can be easily retrieved for official purposes via your employer W2, and any other tax documents that can verify your total income. Don’t forget to include any investment gains as well.
And secondly, you need to add up any debts you may have. This will be a good exercise to go through because it may bring to light some expenses you should cut back on.
Calculating Your Debt-To-Income Ratio
This ratio measures your monthly debt payments against your monthly gross income. It’s a critical number to understand, especially when you’re considering taking out a loan, a mortgage, or applying for a credit card.
Let’s take a look at an easy example to show you how to calculate it.
Here is an example:
Tom has a monthly income of $5,000.
He pays $1,500 in rent, $400 for a car payment, $200 for student loans, and $300 in credit card payments.
In total, Tom’s monthly debt payments come to $2,400
His debt to income ratio is 48% ($2,400 divided by $5,000).
Determining Your Down Payment
The down payment is the amount of money you put down up-front. If you have access to a substantial amount of cash, then you may be in a good position to put close to 20% down, but this certainly is not a requirement.
In many cases, you can work out a much lower down payment. Your monthly payment will be higher, but you still have the chance to buy the house.
There are also first time home buyer loans called FHA which require as low as 3%. Make sure you check into all your options.
We put together some added factors to consider:
mortgage affordability calculator:
There are some really good online mortgage calculators that help you estimate how much house you can afford based on your income, expenses, desired down payment, and interest rates. These tools are easy to use, and allow to quickly implement your figures to see what your potential payment may turn out to be.
Of course this isn’t the sole factor to rely on, make sure to consult with a trusted mortgage professional.
Speak with a mortgage lender:
Perhaps you have a friend, or a friend of a friend that may be in the mortgage industry. That is a good place to start. Have a brief consultation so you can get a professional opinion on what your options may be.
Remember, it’s not entirely about what your mortgage payment. Additional costs like property taxes, homeowner’s insurance, and potential maintenance expenses also come into play.
