If this question has popped up in your mind, you are in the right place. When someone wants to know how much house they can afford, they are essentially wanting to know how much mortgage they can afford, and also how to find the right mortgage broker.
In this article, I will explain how you could figure that out. Additionally, I will list some house affordability calculators for your convenience.
So without further ado, let’s get started.
What is Your Income
The answer to the question how much house can I afford mostly depends on how much you earn every month. Traditionally, only pre-tax income used to be taken into consideration. But focusing solely on pre-tax income when calculating mortgage affordability isn’t ideal. While it plays a role, considering only pre-tax income can paint an incomplete picture of your financial capacity. Here’s why both pre-tax and after-tax income are important.
Pre-tax income is useful because it is used for calculating affordability ratios like the debt-to-income ratio or DTI. But after-tax income paints a more comprehensive picture about one’s actual spending power as most people pay their mortgages with the money that is left after taxes and other deductions. Lenders use after-tax income to gauge realistic affordability of the borrower. Hence, to answer how much house can I afford, you need both incomes.
The Debt You Own
After income, the next thing lenders look for is how much debt the borrower owns. All your existing debts, and how much you are paying every month on those debts are both important parameters for lenders. So, not just Include your debts, but all your ongoing debt payments like student loans, car loans, and credit card bills in your calculation.
I already mentioned the debt-to-income (DTI) ratio. This is an important metric as it compares your total monthly debt payments to your pre-tax income. Typically, lenders typically prefer a DTI ratio of 36% or below. Some lenders, however, allow higher ratios for well-qualified borrowers.
Round Up Housing Expenses
The answer to the question how much house can I afford will never be found without taking the payment of the mortgage into consideration. In order to get a full picture, consider the principal, interest, homeowner’s insurance, and property taxes. You may not get the true picture, but you will have more or less the right access to the amount of mortgage payment. For accuracy, you may consider a mortgage lending institution. You will get a realistic estimate of your monthly installment upon the size of the loan and the interest rates.
However, mortgage payments are not the only housing costs. Other housing expenses include such costs as homeowners association (HOA) fees, utilities, and repairs. Maintenance is a necessary evil. You could not have omitted it. However, maintenance expenses may seem to be small, but there are so many such costs, and they tend to accumulate over time, creating more of the total cost. The main maintenance costs include housekeeping, house cleaning and repair cost, cost of installing security system, cost of pool cleaning and rain gutter clearing and landscaping and new roof installment costs.
Down Payment Negotiation
Down payment is like a double-edged sword. While a large down payment reduces loan amount and monthly payment significantly, when you factor in your future goals and unplanned costs, paying a voluminous down payment month after month may not seem realistic.
The key factors that affect down payment negotiations are:
- Market conditions.
- Property type.
- Financing type.
- Seller motivation.
When plenty of buyers are competing for a limited number of properties, down payment negotiation can be difficult. Similarly, getting favorable down payments for luxury properties is tough, but easy for properties that look a bit run down or in a far-off place. Another thing to keep in mind is that if a seller is hard-pressed to sell the property – for whatever reasons – the buyer might have some wiggle room in down payment negotiations.
Online House Affordability Calculators
House affordability calculators are just a click away. There are plenty online. The top ones are Nerdwallet home affordability calculator, Bankrate home affordability calculator, Forbes home affordability calculator, Rocket Mortgage home affordability calculator, SmartAsset home affordability calculator, etc.
If you have the question “how much house can I afford,” the best way to get guidance is from a professional. That being said, the affordability calculators listed above are also quite useful. These calculators come with user-friendly interfaces, so using them would be seamless. They also emphasize on monthly payment affordability, and compare different loan options, they also require minimal input and focus on pre-approval eligibility for prospective homebuyers.
Conclusion
I guess once you read this article, the question “home much house can I afford” will stop bothering you. This article helps you get a general idea of home mortgage affordability. I strongly recommend you to hire a professional for a more comprehensive idea, but following the tips shared here and using the house affordability calculators listed here will give you an edge.