“How much house can I afford?” is a question we hear frequently from those looking to purchase a new home. The mortgage you can afford depends on many factors, including annual income, & down payment amount.
However, before you begin looking for a home, you should get a full preapproval or more commonly called a “Pre-approval Letter” from a lender based on verification of your credit & income, because that will give you a more accurate idea of how much you can borrow.
In order to qualify you for a loan & determine your interest rate, a lender will look at a variety of factors, including your income, assets, down payment, credit score, debts & job history. The higher your credit score, the lower your interest rate will be for conventional loans, which in turn means your payment will be lower. To break down the details more, here is a list to consider:
This is the combined annual income for you & your co-borrower. Include all income before taxes, including base salary, commissions, bonuses, overtime, tips, rental income, investment income, alimony, child support, etc.
This is the amount of money you will put towards a down payment on the house. Make sure you still have cash left over after the down payment to cover unexpected repairs or financial emergencies.
Include all of your & your co-borrower’s monthly debts, including: minimum monthly required credit card payments, car payments, student loans, alimony/child support payments, rental property maintenance, & other personal loans.
This is a VERY important & critical part of the affordability process that determines what you can afford or not. Your DTI is expressed as a percentage & is your total “minimum” monthly debt divided by your gross monthly income. Lenders have different guidelines that they follow. The conventional limit for DTI is 36% of your monthly income, but this could be as high as 43% for some loans. A DTI of 20% or below is considered excellent & although this would be awesome & save you a lot of money, it’s also rare, so don’t think you have to have your DTI at 20% before you begin.
To calculate your ratio, determine your monthly debts, which will include your new house payment, & other monthly debts like credit card minimum payments, student loans, car loans, alimony, child support, personal loan, etc. Now divide this number by your gross monthly income including all income that can be documented through paystubs or your tax return. You can use a mortgage calculator to help you with your estimation.
The value represents an annual tax on homeowners’ property & the tax amount is based on the home’s value.
Commonly known as hazard insurance, most lenders require insurance to provide damage protection for your home & personal property from a variety of events, including fire, lightning, burglary, vandalism, storms, explosions, etc.
MORTGAGE INSURANCE (PMI)
Mortgage insurance is required primarily for borrowers with a down payment of less than 20% of the home’s purchase price. It protects lenders against some or most of the losses that can occur when a borrower defaults on a mortgage loan. This is commonly referred to as PMI (Private Mortgage Insurance).
HOA fees are to cover common amenities or services within the property such as garbage collection, landscaping, neighborhood pool maintenance, etc.
So, this gives you a clear, concise idea of what you need to do to get an accurate figure of what you can afford to buy a home or property.
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