So, you’ve found your dream home, but just how much of it can you afford to buy? We find many people asking themselves this question when they go through the home buying process. At Team Crescenzo, we understand that the entire process of buying a home from start to finish can be stressful. However, we are here to help make the process as simple and seamless as possible for you. One way we can help is by answering this question, “How much house can I afford to buy?”
Something to consider when purchasing a new home is how much your monthly mortgage payments will be. There are a few factors to consider when determining how much you can afford to pay each month towards your mortgage. First, you’ll want to look at the monthly payments you are already making, such as student loans, or car loan. You’ll then want to make a note of your household income as well as how much is in your savings.
Once you calculate all of this, you’ll have a general idea of what you can afford to pay each month. However, we do recommend keeping in mind that you may always run into unexpected expenses. Considering this, we recommend having a few months worth of payments regularly in your account. This will allow you to take care of those unexpected expenses, while still covering your monthly mortgage payments.
DTI Ratio, or debt-to-income ratio, is the percentage of your monthly gross income that you use to pay your total monthly debts. Determining your DTI ratio helps us understand how much money you can borrow, as well as how well you would manage having monthly mortgage payments.
There are two types of DTI ratios we will calculate, the first is front-end DTI, and the second is back-end DTI. To determine your front-end DTI ratio, we calculate how much of your gross income goes towards housing costs. Your back-end DTI is a calculation of the percentage of your gross income that goes towards other debt types such as student loans, credit cards, and so on.
For example, let’s say your monthly debt payments add up to a total of $820. You will then take this total and divide it by your gross monthly income, which in this case we will say is $5,000. So, 820 divided by 5,000 leaves you with 0.16, or 16% DTI. Your housing expenses typically should not exceed 28% of what you make in a month. The lower your DTI ratio is, the better you will look to lenders.
While what we have mentioned above is something to consider when determining how much house you can afford to buy, there are some additional factors you may want to consider. For example, how is your credit score? Depending on how high your credit score is, you could potentially be qualified for more loan choices, as well as lower interest rates. Something else you may want to think about is how much you are able to put towards a down payment on your home. Generally, you should ideally put 20% down on your new home. However, there are other options, such as an FHA loan, if you do not have the ability to put that much money towards a down payment.
Purchasing a new home is a big, yet rewarding investment. Understanding how much house you can afford to buy will help narrow down your options, and allow you to have a realistic look at your future as a homeowner. At Team Crescenzo, our goal is to provide you with the mortgage experience you deserve. Call us today at 843-628-4860 if you want to discuss any of the above information further, or if you have any questions!