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How Much House can you Really Afford?

One of the biggest questions that many prospective homebuyers, especially first-time homebuyers, have is how much house they can afford. It is only natural to be concerned that you might be getting in over your head with more of a mortgage than you can actually afford when you begin to consider the purchase of a home.

If you are thinking of buying a home in the near future, it can certainly be helpful to have a solid idea of how much you can afford to spend on the purchase of your next home. There are two different perspectives that should be taken into consideration in regards to how much you can afford to spend when buying a home.

First, you need to think of the mortgage amount that you will be able to qualify for. This can depend upon a variety of factors, including your income as well as your credit history, existing debts and your credit score. There are many different guidelines that can be used to determine how much you should spend on your home purchase. One of those guidelines calls for spending no more than three times your current income. This is a basic guideline that has been used for many years and it is quite simple to calculate. Take your gross income and multiply it by three to determine the maximum amount of home that you should purchase. For example, if you make $100,000 per year; the maximum amount you should spend would be $300,000. Of course, different factors can influence this guideline including the interest rate you are able to qualify for. If you are only able to qualify for a higher interest rate for some reason, such as poor credit, then this will naturally affect the amount of your monthly mortgage payment and the amount that you are able to spend on the purchase of your future home.

Another common guideline is the 28% rule. Many banks use this rule, a housing expense to income ratio, to determine how much you are able to qualify for. This guideline is based on projected housing expenses, including mortgage, principal, taxes and insurance, divided by your total monthly income. For instance, if your income is $5,000 per month, you would qualify for a mortgage with housing expenses not to exceed $1,400 per month.

In addition to the 28% Rule, most banks also utilize another ratio, the 36% Rule. This is the debt to income ratio or the back-end ratio and it is based on your total monthly debt payments divided by your gross monthly income. Debt payments include your mortgage but also car loan payments, credit card payments, etc. Based on this guideline, your total monthly minimum debt payments, including mortgage, should not exceed $1,800 if you have a gross monthly income of $5,000.

In some instances, the amount of house that you are able to afford may be based on the type of loan that you take out. For instance, there are special FHA rules that apply to certain loans such as a FHA mortgage. The housing expense to income ratio on a FHA loan cannot exceed 29% while the back end ratio for a FHA loan cannot exceed 41%.

You should also consider how much you are able to put down on the purchase of a home. While there are many loan programs that offer low down payment guidelines, it is still advisable to pay as much down as you can afford to keep mortgage payments low and avoid private mortgage insurance whenever possible.

Beyond these various guidelines, you also need to consider how much home you actually need. Remember that just because you may be able to qualify for a certain mortgage amount does not necessarily mean that you need to spend that much. Based on their current underwriting guidelines, a bank will usually qualify a borrower for the maximum amount possible. That does not necessarily mean that you should take advantage of all of the credit that is available to you. If something unexpected should happen in the future, such as medical expenses or the loss of a job, you do not want to find yourself in a position where your mortgage payment is suddenly unmanageable. Making sure that you keep your mortgage payments on the lower end of the spectrum of what you can actually afford will ensure that you have plenty of leniency in the event that there should arise a problem in the future.



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