How Much Home Can You Afford?

Over the last few years, there have been countless people that have been scared away from the housing market. We have all seen the foreclosure numbers and seen the volume of homes being purchased declining, which has steered many people away from purchasing a home, and has made renting seem like a much more viable option.

However, in hindsight, if you are financially secure, now is the perfect time for you to enter the market, especially if you are a first-time home buyer.  The market will definitely back as the economy continues to rebound, and this is precisely how many people made their money when the last boom hit. They had purchased homes when the market was down and sold when it was hot: the classic buy-low sell-high strategy.

When you decide that you are ready to buy your first house you need to understand what your budget is going to be. This can get you on the road to purchasing your home by searching in the right market before you have to finish your mortgage application. This should take a little bit of the edge off when you first start weighing all of your home options. You do not have to worry about being rejected by a bank or undergoing that embarrassment, if you can come up with an idea of what you can afford on your own.

Importance of Debt to Income Ratio

First, you need to look at the debt to income ratio that you currently have. This is what your mortgage company is going to start with. This will be a complete list of debts that you currently have, including credit cards, student loans, car payment, and so on. What this explains to the mortgage company is what percentage of your income is being paid on current payments each month. Don’t be frightened by this number, as it is essential on getting you started with this process.

With the recent struggles in the housing market, the numbers have changed. If you are spending more than 36% of your income on current debt, you will have little chance of getting a loan. Most companies will be looking for up to 28% of your income to be used towards your mortgage. This makes it feasible to pay that mortgage payment each month, and as much as you want to purchase a fully finished home that is ready to go, it might not be possible for you at this time.

How to Calculate your Amount

So what do you need to do to calculate this amount? First you are going to need to find out the total amount of income in your household before any taxes are assessed. For married couples, this should be the combined income of both individuals.  You take this number and multiply it by 36% percent, or .36.  Take the answer and put it off to the side. Now take all of the current bills you are paying per month and add them altogether to calculate how much you are currently spending per month. Subtract that number from the sum that you wrote down before (your total income), and that is the number you should be able to pay per month for your mortgage, including taxes and all insurances.

Of course no bank is required to give you a loan that will match that amount, but it will give you a good foundation for loan applications. This is mostly for your own use when  starting the process of purchasing a home.