If you feel like you’re ready to buy a house, the first question you’re likely to ask yourself is “how much can I afford?” Answering that question means taking a look at a number of factors.
Are You Ready to Buy a House?
Understand Your Debt-to-Income Ratio First.
The first and most obvious decision point involves money. If you have sufficient means to purchase a house for cash, then you certainly can afford to buy one now. Even if you can’t pay in cash, most experts would agree that you can afford the purchase if you can qualify for a mortgage on a new home.
The 43% debt-to-income (DTI) ratio standard is generally used by the Federal Housing Administration (FHA) as a guideline for approving mortgages. This ratio is used to determine if the borrower can make their payments each month. Some lenders may be more lenient or more rigid, depending on the real estate market and general economic conditions.
A 43% DTI means all your regular debt payments, plus your housing-related expenses—mortgage, mortgage insurance, homeowners association fees, property tax, homeowners insurance, etc.—shouldn’t equal more than 43% of your monthly gross income.2
For example, if your monthly gross income is $4,000, you multiply this number by 0.43 to get $1,720, which is the total you should spend on debt payments. Now, let’s say you already have these monthly obligations: Minimum credit card payments of $120, a car loan payment of $240, and student loan payments of $120—a total of $480. That means theoretically you can afford up to $1,240 per month in additional debt for a mortgage, and still be within the maximum DTI. Of course, less debt is always better.
Most mortgages are long-term commitments. Keep in mind that you may be making those payments every month for the next 30 years. Accordingly, you should evaluate the reliability of your primary source of income. You should also consider your prospects for the future and the likelihood that your expenses will rise over time.
Can You Afford the Down Payment?
It’s best to put down 20% of your home price to avoid paying private mortgage insurance (PMI).
Usually added into your mortgage payments, PMI can add $30 to $70 to your monthly mortgage payment for every $100,000 borrowed. There may be some reasons that you might not want to put down 20% toward your purchase. Perhaps you aren’t planning on living in the home very long or have long-term plans to convert the home into an investment property.
Being able to afford a new house today is not nearly as important as your ability to afford it over the long haul. Needless to say, being able to afford a house and having a down payment doesn’t answer the question of whether now is a good time for you to act on that option.
Consider all your real life factors, how’s the market?, compare house prices, square footage, location and what the homes include, standard features vs adding more options, are there any seller incentives?, these are just a few things to consider when purchasing a home.
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