How Much Home Can You Afford to Buy?

Victorian House
Creative Commons License photo credit: roarofthefour

Many people are interested in buying a home right now while housing prices across the nation are low. However, they have learned their lessons from the problems of the recent past and definitely want to make sure that any home they do buy is a home that they can actually afford. It’s obviously important to figure out what you can realistically afford to pay for a home so that buying a home doesn’t get you in to big financial trouble. Unfortunately this type of important assessment isn’t actually that easy for the average person to figure out. Following you’ll learn about the different things that you need to look at when you are trying to determine how much home you can afford to buy.

Debt-to-Income Ratio

One of the first things that you’re going to look at when you’re trying to determine how much you can afford to pay on a home is your total debt-to-income ratio. This is the amount of all of your debt (not just your housing debt) as it compares to all of your income. The magic number that you’ll want to look for is 35; you don’t want to have more than a 35% debt-to-income ratio. In order to determine this, you’ll need to calculate all of your existing debt and weigh it against your income. Any housing debt that you add to the existing debt should not cause the debt-to-income ratio to exceed 35%.

Housing Payment-to-Income Ratio

Not only do you need to look at your total debt-to-income ratio but you should also look at the ratio of the housing payment itself to the income that you earn. You should aim for no higher than a 30% payment-to-income ratio. To determine this, figure out what your monthly income is and make sure that the monthly payment on the home will not put you at a payment-to-income ratio of higher than thirty percent. In other words, about one third of your monthly income (and no more) should be going to the housing payment.

Considering Other Expenses and Changing Income Factors

When looking at numbers like these, you need to make sure to take into consideration a number of other factors that can impact your debt, housing payment and income numbers (as these will clearly impact your ratios). Think about the savings that you’re trying to put away for the children’s college funds or your own retirement. Determine whether your income is likely to change (for better or worse) in the near future. Consider whether any of your debt is going to change significantly (such as when low-interest credit card balance offers expire and higher interest amounts take their place). Re-calculate the above ratios to get a better picture of what amount you can afford to pay for your home.

Considering Other Housing Costs

Remember to keep in mind that there will be additional housing costs when you own your own home. You will need to pay for property taxes and home owner’s insurance. You also need to put money away in case repairs are needed for the home. And you may have additional expenses like fees owed to a home owner’s association. Make sure these get factored in to your assessments.

Down Payment Information

You’ll need to make sure that you have saved up money for a down payment. The more money that you can put down up front the more home you’ll be able to afford. Figure out how much you have and what percentage that is of the home that you want to purchase.

Mortgage Terms

One of the things that you’ll probably need to discuss with a lender before you can actually figure out how much home you can afford is the mortgage loan. You need to figure out how much of a loan you can get and at what interest rate. You will want to determine what length of loan makes sense for you (30-year term for example) and how that changes the monthly payments and other numbers that you’ve looked at.

Resources for Calculating How Much Home You Can Afford

Although these basic rules of thumb can be followed to give you a good idea of how much home you can afford, there are also other resources out there for making this determination. You can look at housing calculators online which are designed to give you this information; bear in mind that they may differ from your real numbers particularly if their source is a lender. You can also work with a financial planner who will be able to run all of the numbers in your life and to give you a good picture of what you can afford to pay on a home.