Buying a house is a big investment and it’s quite easy to get excited. But in reality, it’s very important to know about what you can afford. Knowing your budget and hunting for homes will make the process run smoothly. If the homes are not in your price range then just neglect them.
Determine how much you can afford by checking in the home affordability calculator. This will let you know how much you can afford and how much is needed for your down payment as well as closing costs.
For instance, to check how much home you can afford on a calculator just enter the location, yearly income, monthly debts, and finally the money you have for a down payment plus closing cost. This information will let you know how much amount of a loan you can take.
The 29/41 Rule And How It Relates To Calculating Home Affordability
29 represents your house expense ratio, which is calculated by dividing your mortgage payment into your gross monthly income and then converting it to a percentage.
Principal + Interest + Property Taxes + Insurance (Homeowners & Mortgage)+ Homeowners Association Dues
_____________________________ × 100
Gross Monthly Income
The 41 represents,
Installment Debt + Revolving Debt Payments _________________________________________________ × 100
Gross Monthly Income
The 29/41 rule is very important to know when you think about your mortgage qualification because DTI helps lenders to know your capacity to pay your mortgage.
Other Factors That Determine How Much Home You Can Afford
Other than DTI and housing expense ratio there are some other factors to keep in mind before you look for a new home.
Mortgage term
It refers to the time you’ll take to pay the amount, the common loan terms are 15 and 30 years. Suppose you’ve closed your home loan the monthly mortgage payment will be a huge amount of debt to pay. So decide how much you can afford it.
Mortgage interest rates
It refers to the interest rate on your mortgage. The rates are determined by your lender which can be either fixed or adjustable. The interest rate can vary depending on the credit score, down payment, etc.
Monthly budget
How much is your budget? If there’s a shortage then keep track of your cash inflow and outflow for a couple of months. Then create a budget sheet to follow.
Down Payment
The interest rates are decided by two factors which are down payment and median FICO. If the down payment is high, the better your interest rates. If it’s less than 20% then you must pay for mortgage insurance. This protects your lender and the mortgage investor if you fail to make payments.
Overall, how much home you afford will depend on your financial situation so evaluate it. Once all the steps are completed, it’s time to get the keys to your dream home.