One of the first things most home buyers ask themselves is: "How much home can I afford?". There are a lot of things to consider when trying to figure out just how much you can afford.
First - clean up your credit. The better your credit, the lower the interest rate you'll qualify for and the more money you'll be able to borrow. Most loan officers can help you with your credit concerns - they may even have a program already in place or a contact who can help you. Cleaning up your credit can make your home-buying dollar stretch as far as possible.
Financial Priorities - buying a home may not be your only financial goal. Depleting your life savings and forcing yourself to live from paycheck to paycheck may not be the wisest course of action. Many people are starting to think about other financial goals much younger than they have in the past. Consider just a few other thing you may want to begin funding, such as:
- A Retirement Fund
- A College Fund for a Child or two
- A Vacation Fund
- New Car Fund
If you have other financial goals in mind, you may want to look at borrowing less money on a house so you have the ability to continue putting money in these other areas.
Cost and Debt Ratios - a loan officer can help you by determining your cost and debt ratio or your total monthly housing costs.
To determine your cost ratio, a loan officer will take your Principal, Interest, Taxes and Insurance (also known as PITI) and divide this amount by your total monthy pretax income. Many lenders like to see a maximum of 28% of your income going towards housing, but some will go as high as 33%.
Next, your debt ratio. This is determined by adding your PITI plus all other monthly debt and dividing that by your total monthly pretax income. A maximum between 36-38% total of your mortgage and debt payments to your income is where most lenders want you to be - nothing higher.
Assistance Programs - Yes, there are still assistance programs out there. The federal government offers many programs to potential home buyers. The best course of action is to sit down with your loan officer and let them find out what you can and can't qualify for.
In the end, a licensed mortgage loan officer is your best bet on understanding exactly how much home you can afford to buy. They have the tools and the experience to help you understand exactly what you can and can't do. Contact one today with any questions you might have.