5 Tips to Determine How Much New Home You Can Afford


5 Tips to Determine How Much New Home You Can Afford

Posted by : Admin

Buying a home is one of the biggest purchases most people make in their lifetime. It can be an intimidating experience, especially for first-time buyers. An important step in the process is accurately determining how much house you will be able to afford. After all, nobody wants to bite off more than they can chew.

These five tips will help determine how much you can afford to spend on a house, so you can be confident you’re making a smart financial decision.

  1. Take Stock of Your Income

A big component of your house budget is your income since, after all, you’re going to have to pay your mortgage every month. Look at the amount of money you currently make, but also consider how stable your job is and the likelihood of getting either raises or pay cuts down the road.

  1. Review Your Debt Load

Now look at how much you owe. This includes auto loans, student loans, credit card debt, and anything else you owe money on. A high amount of debt may mean you need to decrease your house budget. If you’re debt-free, you can afford a bigger, newer home in a better neighborhood than you may have thought.

  1. Now Look at Your Income and Debt Together

A big ratio that mortgage lenders use to determine whether to extend you a loan, and how much to give you, is a debt-to-income ratio, or DTI ratio. Add up how much you pay out on your monthly debts and divide that number by your total monthly income to reach your DTI ratio. The lower your DTI, the better. If it’s under 40, you can feel good about your chances of getting approved for a mortgage loan. Remember, some loan programs (like FHA) are more lenient on their DTI limit.

  1. Calculate the Amount You Can Pay Down

If you’ve squirreled away a substantial amount to pay down, it will  give you some leeway on being able to afford a more expensive home. If you don’t have much, or any, of a down payment saved, there are still mortgage options out there. Knowing how much you can put down will help determine which loan program is best for you.

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  1. Examine Your Expenses and Lifestyle

Finally, remember that your needs are specific to you, and you need to address them. Do you love having a nice, new car? Traveling? Are you planning to send your children to a private school? Do you want to retire early? These expenses and lifestyle choices must weigh into the amount of house you buy.

Buying a house is a big financial move, but you don’t need to stress about it if you take time to plan accordingly. Getting pre-approved for a mortgage will help you to put all of these tips into action, and you’ll end up in a house you both love and can afford.