As you move toward buying a home, a loan officer can recommend the most affordable loan options and help you nail down more specific costs of owning a home.

Understanding How Much Home You Can Afford

Income vs expenses

Getting familiar with your own financial situation is an important first step when calculating how much house you can afford.

Calculate how much money you have coming in each month and how much money you pay out each month.

Include all forms of income, from your normal paycheck to additional money coming in such as child support, investment funds, social security, disability, pension, etc. What income will you rely on to pay for a mortgage?

From here, take note of your monthly expenses, such as bills and money spent on food, gas, and purchases. Also include any debt you pay, such as credit cards, student loans, or auto loans.

Once you know your monthly earnings and expenses, subtract the expenses from the earnings to see how much money you have left to pay toward a mortgage. You might find that you need to earn more or spend less to afford the home you want.

Debt-to-income ratio

When buying a home with a mortgage, lenders will also consider your monthly income and expenses using the debt-to-income (DTI) ratio. The DTI ratio is your monthly debt/expenses divided by your gross monthly income. To learn more about your DTI ratio and how it will affect your loan talk to one of our loan professionals.

Credit score

Learning about your credit score using a free site like CreditKarma, CreditSesame, or CreditWise can be a quick way to get an idea of how you’re doing with your credit. Keep in mind that when you go to qualify for your mortgage the lender needs to request your actual credit report and score, which will give official credit scores and the full details of your credit history. 

Credit score requirements for mortgages can fluctuate, but there are many loan programs available or you can work to improve your score.

Know the Costs of a Mortgage

The terms of a mortgage vary depending on many factors including your financial standing, the condition of the market, current interest rates, and the value of the home you’re interested in purchasing. A loan officer will consider these factors to help you find the most affordable loan for your situation.

As you estimate what you can afford, it’s important to understand both the upfront costs and the ongoing monthly costs of a mortgage.

Down payment and closing costs

Before you can get the keys to your new home, you’ll need to make a down payment and cover closing costs.

Closing costs include the fees you’ll pay to obtain your mortgage. Your down payment covers part of the purchase price of the house upfront, helping to secure the remaining amount you plan to borrow from a lender.

For example, depending on the terms of your loan:

• Closing costs are typically 2-5% of the loan amount.

So closing costs for a $200,000 home would be between $4,000-$10,000.

• A down payment can range from as low as 3% to as high as 20% of the cost of the home.

So a down payment for a $200,000 home would be between $6,000-$40,000 upfront.

Typically the more you can put down, the cheaper your monthly payments will be. If you put less money down, you may take on higher monthly payments to cover costs such as mortgage insurance premiums.

Monthly payments

Calculating the affordability of monthly mortgage payments is important for understanding the ongoing expense of owning a home.

Beyond your down payment amount, your finances and the terms of your loan (such as length and interest rate) will determine your monthly payments.

Don’t Forget Additional Expenses

Beyond ongoing monthly mortgage payments, you’ll want to calculate potential additional costs, such as:

• Property taxes
• Homeowners association fees, if applicable
• Homeowners insurance
• Average monthly cost of utilities
• Potential maintenance

Consider Financial Assistance

If you find that you need assistance affording the home you want, there are several special circumstances and government programs that can help if you’re eligible.

• If you’re active duty or a veteran you can use your VA benefit.
• If you need a low down payment an FHA loan might be the best fit

*Eligibility subject to program stipulations, qualifying factors, applicable income and debt-to-income (DTI) restrictions, and property limits. VA loans subject to individual VA Entitlement amounts and eligibility, qualifying factors such as income and credit guidelines, and property limits. home.com by Homefinity is not affiliated with any government agencies. These materials are not from the VA, HUD or FHA, and were not approved by a government agency.

This article is provided by home.com.

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