How much home can I afford? That has got to be the question in every potential homebuyer’s mind. Regardless of your savings, credit history or monthly budget, when it comes to home loan financing, it can be tricky to guess at home much home you can afford.
Home Loan Financing Gets You Into The Market
The first place to look any time you are intending to buy a home is to the market for home loan financing. This is an important step because getting pre-qualified for a home loan will let you know where you stand and also show realtors that you are serious about finding a home to buy. Having your bank or finance company look at your finances and decide where you stand objectively is quite simple. The fact is, they are as curious as you are! However, they will not be looking at any real estate to establish this number. They will be interested in your numbers much more, specifically your debt to income (DTI) ratios.
The Debt To Income Approach Is All About You
There are two ways to calculate both; consider them different perspectives, if you will. The front-end ratio measures your total pre-tax income against your total home-related payments of loan, insurance, tax and any homeowner’s association fees. The back-end ratio measures your home-related payments as above plus all other significant financial obligations. The front-end ratio should ideally be around a quarter of your income and the back-end ratio should be around 36% or less. There may be some circumstances that permit you to have higher DTI ratios but these numbers will give you an indication of what will be considered.
Work Out Your Own Budget
Sit down and work out how much you spend each month and don’t forget to add in a twelfth of your annual expenses also. If your calculations show financial obligations approaching half of your pre-tax income you are going to need to either pay off some debts or set your sights lower.
The upper limit that banks are known to use, as a hard cutoff, is 45% DTI.
Once you know your payment abilities only then can you consider how much home that will buy. This is determined by the terms of your mortgage. You can get a rough estimate from Internet loan calculators on sites such as Zillow.com but get pre-qualified with your bank for an official estimate.
There will be some variations that change because of your particular situation and because of the economy and interest rates. If you have savings that you can invest at closing then it will alter the home you might be able to purchase. Alternatively you might want to use your cash to clear out some personal debt, as that could potential be just as effective.
When it comes to home loan financing every borrower’s situation is unique. And you are going to be under the microscope with any lender that considers your application for a mortgage. Knowing your DTI ratios and your personal monthly budget before you start house hunting. First step to figure out what you can afford and get pre-approved before you hang your hopes on one particular house or condominium.