So you may be wondering, “How Much Can I Afford For a House?” Well, there are several things that you can immediately do to get the best mortgage rate, once you determine what you can afford for a house. First, improve and clean up you credit score, align and consolidate your debt, save up for a significant down payment, then search for an experienced mortgage broker. All these steps are crucial and will have to be taken once you find out how much you can afford for a house. Why?, because you will not get approval if the mortgage company determines you cannot pay them back. So when searching for your dream house, you need to know… how much can I afford for a house? After all, all mortgage companies care about is your ability to pay back what you borrow. They determine this by by assessing your credit history, your monthly income, how much of a down payment you are willing to putting down.
So.. How Much Can I Afford For a House?
First, do your homework by researching different trends in the current interest rates, as the interest rate plays and contributes to a large portion of your monthly payment. Clean up your debts as best as possible, this will help you get a good rate since it improves your credit score, one of the key determining factors when computing interest rates. Make sure you save up for a ‘reserve fund’ of at least four to six months of mortgage payments to eliminate any type of emergency that may effect paying your monthly mortgage payments.
The Type Of Mortgage Determines How Much You Can Afford For a House
There are 2 types of mortgages. Adjustable rate mortgages and Fixed rate mortgages.
Each has its own ‘method of payment’ rate computation. This determines you the borrower, in deciding which type of mortgage is right.
A fixed-rate mortgage most commonly has a higher interest rate than an adjustable rate mortgage. This is because the fixed rate loan has to regulate for and compensate any potential losses from a future increase in the interest rate. This is because the monthly mortgage payment remains the same regardless of market conditions. Although monthly payments of a fixed-rate mortgage is higher than an adjustable rate mortgage, fixed-rate mortgages always remain the same, month after month, thus eliminating any fluctuations based on the rates going up or down.
The adjustable rate mortgage most often is more affordable as it offers a lower interest rate. The borrower can also usually qualify for a larger loan since the payment and mortgage rate is lower. But, due to the ever changing and fluctuating interest rates, the mortgage payment may suddenly take an unexpected rise in payment, making it potentially un-affordable when the rate does go up.
How Much Can I Afford For a House Is Based On 2 Factors: The Front End Ratio And The Back End Ratio
Front End Ratio
The total sum of your monthly mortgage payment, which includes: real estate taxes, homeowners insurance, the principal and mortgage payment should not exceed 28% of your monthly (gross) income. Here is a formula you can use:
Take your annual combined salaries and times it by 0.28/12 (months).
As an example, If you earn a duo income of say $60,000 a year, multiply that by 0.28, then divide it by 12 months.
You get a ‘front end ratio’ of $1400. So you can basically afford a mortgage loan of $1400 per month.
Back End Ratio
To calculate your back end ratio, your ‘total debt to income’ should not exceed 36%. This is your total debt owning which includes: your monthly mortgage, all debts owed, your car loan, credit card payments etc. The basic allowable debt to income ratio is:
Your annual salary x 0.36/12 (months). So, based on your $60,000 annual income, your allowable ‘debt to income ratio’ would be $1800.
So, if your monthly mortgage payment is $1400, then your debts should not exceed $400.
Use A Mortgage Calculator To Determine How Much Can I Afford For a House
You can calculate exactly how much house you can afford by using a mortgage calculator. There are free mortgage calculators online where you will know the exact payment per month you can afford based on your situation.