Have you been dreaming of owning a home of your own? Perhaps you envision a home in the country with a few acres and a shop, or maybe you would rather have a condo in a high rise building in the city. Regardless of the kind of home you want, if you’re a first time home buyer, you’ve probably wondered, “How do I know how much I can afford to pay for a home?” Primary Residential Mortgage Inc. has the answer to this question and any other questions you may have about purchasing a home.
Most lenders use a popular formula to assess how much of a mortgage you may qualify for, and it’s known as the 28/36 rule. This rule suggests that your mortgage payment (including property taxes and homeowners insurance) should be no more than 28% of your pre-tax income. The 36 refers to your total debt (including your mortgage and any other debts, like a car payment), and it should be no more than 36% of your pre-tax income.
While these numbers are a guideline for many lenders, there are some cases where you may still be able to qualify with a higher ratio. For example, some lenders might allow borrowers with a higher credit score to have a slightly higher debt-to-income ratio. Also, some loans allow for higher DTIs, such as FHA loans, which may allow up to 43% or higher.
Getting pre-qualified for a mortgage is a significant step in determining how much home you can afford to buy. During this process, a lender will review your finances to determine how much they are willing to lend you. This pre-qualification amount can then help you shop within your budget. However, just because you qualify for a specific amount doesn’t necessarily mean you can or should try to afford it. The pre-qualification process typically takes your income and debts into account, but it doesn’t include your spending habits or personal savings goals. The last thing you should want is to be “house poor,” meaning your monthly loan amount is so high that you can’t afford to do anything or go anywhere.
When determining how much home you can afford, lenders will take into account your income, debts, and amount of down payment. Additionally, the interest rate you get will make a big difference in how much home you can afford because a lower interest rate may significantly lower your monthly mortgage payment. Your personal savings goals or spending habits will also have a significant effect on your affordability, so remember to consider these when determining your home-shopping budget.
It’s easy to use or download a mortgage calculator app as a first step to estimate how much home you can afford. However, the best way to figure it out is to call a loan professional at Primary Residential Mortgage Inc. What are you waiting for? Give us a call today!
Note: Opinions expressed are solely my own and do not express the views of my employer