Four things that can help you determine how much house you can afford.
How much home can you afford? A lot of people ask us what their purchase price should be, and to answer that, you really have to go over four specific things:
1. Credit. Your credit will determine the interest rate that your lender gives you, and the interest rate determines your monthly payment. The first thing to do is talk to a trusted lender about your credit.
2. Down payment. If you have a lot of money saved up to put down, your loan will be smaller, which means you can afford more. If not, you’ll have to finance more, and it may affect your buying power.
3. Debt-to-income ratio. This is the amount of debt you have divided by your income. Your lender uses this to determine your affordability, and most of them will want to be below a 40% to 42% debt-to-income ratio.
That means that they want all of your debt plus your projected monthly mortgage payment to be less than 40% of your income. If it does exceed that point, they won’t approve you for a loan. Your pre-approval will be for a price that would put you at the 40% mark, but personally, I prefer to stay below that amount because it feels like it stretches people too far.
4. Payment and financial plan. Just because you’re approved up to a 42% debt-to-income ratio doesn’t mean you should take advantage of that. In the 80s, a lot of people said you should only go up to a 25% ratio so that you have more money to do what matters to you. That more expensive house might seem new and shiny for the first few months, but after that it just feels like more space to clean.
If you have any questions about these four things or real estate in general, call us at (717) 216-0860 or email us at Dave@DaveHookeTeam.com. We would love to have a conversation and give you the guidance you need to make a great decision.