How to determine how much house you can really afford
an be confusing to try and pick out the information you really need to know. Many first time home buyers are especially bewildered when it comes to determining how much house they can afford. This is especially important to consider even before finding a house you love since determining how much you can afford in a house payment plays a large role in all the decisions that go to selecting your future home. Your house payment can affect everything from neighborhoods where you look, to the size of the house, or even the types of financing you choose.
The first thing to know is that there are some key ratios that need to be considered when first exploring the world of home buying. The key determination from the lender will be the debt to income ratio. As a general rule your monthly debts (this includes car payment, credit cards, school and personal loans) which are any reoccurring debt with more than 3 months left to pay is totaled as one amount. This amount should not exceed 36% of your gross monthly income. Some FHA loans do allow a slightly higher percentage of debt by potential borrowers.
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The next thing your lender will consider is called your housing expense ratio. Banks and other lenders usually want your mortgage payment to total no more than 28% of your gross monthly income. If you are making a large down payment sometimes this rule can be stretched. Some borrowers will qualify for a mortgage with a 33% housing expense ratio if they can put down 20% of the house cost as a down payment. If your ratio is much higher than 28% it will make it much more difficult to obtain a loan.
There are certain factors that you should be aware of before even approaching a lender. Having this information at hand will help you deal efficiently with the pre approval process and in determining how much house you can afford. These factors are:
Know down to the last dollar how much your gross monthly income is.
Know all of your outstanding debts and monthly obligations. Your lender will run an extensive credit check so know what he or she will find.
Understand your credit history and credit rating. If you are unsure about either check out the many on line sites that can educate you about your credit history and how to improve your credit score if needed.
Know what cash on hand you will have available for down payments and closing costs.
Research types of mortgages and interest rates so you can make an informed choice.
Understand that the price of purchasing the house is only one factor to consider. Many home buyers do not consider the additional cost of insurance and taxes that must be paid as well.
Finally consider using one of the online calculators. These calculators can run you through the calculations you need to determine to the dollar how much house you can afford. They are a great tool to be used in helping to navigate the world of real estate. Do not underestimate the importance of determining how much house you can truly afford. Foreclosure stories abound of those unlucky homeowners who find themselves literally drowning in debt while trying to make a house payment and finally have to give up their dream. Doing some homework, research and being prepared can make all the difference in determining how much house you can really afford. Once you know how much you can really afford you can go on to the find that dream home without worry and make it a reality.
