If you are looking to buy a home be sure to know your price range before you begin house hunting. It is always better to have a precise idea of how much home you can afford to ensure that you are only looking at houses that are within your price range. But how much house can you afford? If you are unsure of how much you are able to spend on a house, read on:
Talk to a mortgage lender
Before you seriously go house hunting, consult a lender first. Get pre-qualified and get estimates. The lender or lenders, if you can consult with several, will help you determine how much you’ll be able to finance through a loan and what your monthly payments will be. That will give you a definite idea of your price range and you can target your home search based on your qualification.
Use home affordability calculator
Many real estate and financing websites feature home affordability calculator which you can use to calculate how much house you can afford. It analyzes your monthly income, expenses, debts, and specified mortgage rate to calculate the most affordable mortgage within your means.
Calculate your monthly housing costs
Once you have an estimate of what your monthly mortgage payment will be, calculate your housing costs. Your monthly housing costs should not exceed 28 percent of your gross monthly income. To calculate your housing costs, add up your expected housing expenses (monthly mortgage payment, real estate taxes, insurances, HOA dues, etc) and divide it by how much you earn each month before taxes. For example, if your total expenses amount to $1200 and your monthly gross income is $5000, your ratio is 24 percent.
Calculate your debts
As a general rule, your total debt, including your mortgage, credit cards, car loans, medical expenses and other obligations should not exceed 36 percent of your monthly gross. To determine the percentage of your debt, add up all your debts and divide it by your gross monthly income. For example if you have total debt obligation of $1,800 and your monthly gross income is $5000, your ratio is 36 percent. Most conventional loans require a debt to income of no more than 45 percent.
Consider other expenses
Also consider other expenses such as your monthly food, commuting, utilities, and entertainment costs. Whatever amount you put on other expenses will leave you with less income to put on your mortgage payments.
Fees and closing costs
Factor in the expenses and fees you will incur for a home appraisal, home inspection and other professional services to buy a home.
Get Pre-Approved! Getting pre-approved is the first step in the buying process, it also acts as a dry run of the loan application process. The mortgage lender will use details you provide about your credit, income, assets and debts to arrive at an estimate of how much mortgage you can afford. It is also FREE and Non-Binding!