How much home you can afford really depends on how much cash you have to use as a down payment, as well as how much of a monthly payment you feel comfortable with. And of course, how much a mortgage lender will loan you.
Obviously the larger the down payment you can afford, the less you will need to finance. And with a larger down payment, the better interest rate you will receive. However, you should not stretch yourself too thin. You ought to make sure that you have sufficient savings left over to handle any of life’s unexpected emergencies. So although “How much
When it comes to monthly payments you must make sure that you take into account all related expenses including principal and interest payments, property taxes, insurance, association fees if applicable and to be on the safe side a certain amount to be set aside for repairing and replacing appliances in the future. Again, avoid maxing yourself out. If you have left over money each month you can always send it in as additional principal payments and pay off your home faster.
When applying for a mortgage loan lenders will base the amount of home you can afford largely on your debt to income ratio (DTI). This involves two calculations. The ‘front end’ ratio and the ‘back end’ ratio. The front end takes into consideration the amount of your total housing payment including taxes and insurance compared to your monthly income. While the back end ratio takes into consideration all of of your monthly obligations (at least those showing up on your credit report) including your housing payment. While allowable debt ratios can vary slightly between lenders and programs the current FHA limits are 29% and 41% respectively.
For example if your new total housing payment will be $1,100 per month and you make $4,000 per month your front end ratio would be 27.5%. Then if you had $500 in additional payments like car loans or student loans you would have a back end ratio of 40%. There are exceptions to these rules depending on the whole picture of your finances. For example if you have an amazing credit score or significant liquid savings you may be able to get a loan with slightly higher ratios.
One tip to keep in mind is that only loans with 10 or more months left to pay are counted against you in your background ratio. So if you can pay down personal loans or auto loans so that they require 9 or less payments to pay them off you will be able to qualify for a slightly larger mortgage loan.