It’s exciting when you take the plunge and begin searching for a new home. With so many options, it can be difficult to decide which is the right choice for you. One of the biggest mistakes homebuyers can make is stretching to buy a home they can’t really afford. This ends up strapping them financially for years.
A smart way to narrow your choices is to determine what you can afford before you even start your search. If you’ve already got a list, cross off the ones that are out of your budget. Use these basic guidelines to help you determine how much house you can afford.
How Much Money Do You Make?
Your income is the single biggest factor in figuring out how much you can afford to pay for a house. Think about your gross and your net income per month. Take into account your job stability, the amount of overtime you work, and any bonuses or commissions you receive. Is your income steady or seasonal? The more money you make, the more you can typically spend for a home.
What Are Current Interest Rates?
An annual percentage rate (APR) has a big impact on how much house you can afford. The lower the interest rates, the less you will pay for your mortgage loan. Even a fourth of a percent can make a big difference in your monthly payment and the total you’ll pay on your mortgage over 15, 20, or 30 years. Read up on the mortgage rates, so you can prepare yourself for the monthly payment.
How Much Savings Do You Have?
It’s good to have money socked away. A hefty nest egg makes a great down payment, giving you the ability to afford more house. If you’ve not been great at saving, you may need to use a loan type that doesn’t require a big down payment — but you’ll need to pay a bigger monthly payment. Take stock of your money in the bank and stock market and decide how much you’ll be using for a down payment. That number will give you a better idea of how much home you’ll be able to afford.
How Much Debt Do You Have?
A key element in your homebuying picture is your debt load. The more you owe, the less you can borrow for your home. Lenders look at your debt-to-income (DTI) ratio. This calculation takes all of your monthly debt obligations and divides the total by your gross monthly income. The lower your DTI, the better off you’ll be when you apply for a mortgage loan. If you have lots of credit card debt, an expensive car payment and student loans, you won’t be able to afford as much house as a person who makes the same amount as you but carries little or no debt.
What Else Do You Spend Money On?
This isn’t figured into any calculation, but it’s important all the same. Do you have expensive pastimes and hobbies? Do you like to travel? Do you enjoy expensive evenings out? Are you always ready to attend the latest concert or go golfing? If so, you may need to consider trimming back how much you spend on your house. The last thing you want is to buy a house that keeps you from having the funds to enjoy what you love doing.
How Good Is Your Credit?
Your credit score will play a significant role in qualifying for a mortgage, which dictates how much house you can afford. If you’ve managed your credit wisely and have an excellent score, you’re more likely to get approved for a bigger loan with better terms than those who have paid their bills late and maxed out their credit cards. When your loan officer pulls your credit, make sure you look at your credit score. This will give you an idea of how much house you’ll be able to afford.
Get Prequalified
Figuring out how much you can comfortably spend on a house is essential before you start your homebuying journey. It keeps you on the right track and helps you avoid falling in love with homes out of your price range. For the best chance of getting that home you love AND can afford, get prequalified for your mortgage. Providing proof to the seller that your lender has verified that you can afford the mortgage will give you a leg up on the competition. Contact us to start that process today.
