Before you buy a house, it’s important to know just how much home you can afford. Determining the mortgage is relatively easy, but it’s important to look at your overall monthly expenditures, including homeowner’s insurance, property taxes, utilities, and basic maintenance and upkeep.
Although requirements vary from lender to lender, many mortgage lenders use two ratios to assess the risk that you’ll default on a mortgage. The first is the ratio of your total monthly housing costs to your total monthly gross income. Ideally, your expected housing costs – mortgage payment, taxes, and homeowner’s insurance – shouldn’t exceed 28% (29% for FHA) of your monthly gross income, although some lenders may allow that percentage to be higher. The second formula that a lender looks at is your debt-to-income ratio. Ideally, your total monthly debt – including your expected housing costs plus credit card bills and loan payments – shouldn’t exceed 36-38% (41% for FHA loans) of your gross monthly income. Again, some lenders allow that ratio to go much higher, but that may not be in your best interest. This may also be different if you qualify for a VA loan.
We can help you with an initial assessment to determine a price range that fits your budget. However, a lender will look at your credit history, income, and other financial documentation to determine exactly which loan product you can qualify for and realistically afford. Be wary of anyone insisting you can afford more than your means though.
The amount a lender approves for your mortgage and what you can afford are not necessarily the same. Sure, it doesn’t hurt to find out the maximum someone will lend you to purchase a home. In fact, it can be pretty exciting if that number is higher than you had anticipated. But don’t start looking at homes in that price range until you determine if the loan and the associated payments truly fit your budget.
Lenders ask for a lot of information about you—details about your job, your salary, outstanding loans and other debts, previous residences, etc. But they don’t typically delve into your future plans. If you have college tuition bills looming for a child or two (or three), your financial situation may be about to significantly change. Ditto if you may have to contribute financially to help out elderly parents. A career change or job instability, plans to have children, and other big life changes also can make a difference in your housing budget.
Whatever your situation, make sure you consider the details about your life that only you and family know when deciding how much home you can truly afford.
Source: Texas Association of Realtors®