How Much Can You Afford?

When you decide the time is right to buy a home, the first question you have to be to be able to answer is “How much can I afford”. The answer will be based on your current income weighed against your expenses. Armed with this information you can concentrate your search on homes within your price range, even before you apply for a mortgage.

Why is this so important? Just imagine the disappointment you would feel after finding the home of your dreams but then finding out you cannot afford it.

Another reason is that reports from the Federal Reserve indicate that a record numbers of households are taking out mortgages with higher risks, to achieve lower initial payments. In this way, you not only risk losing your home, but you also put your financial future at risk.

So as mentioned earlier, how much you will be able to afford for a home loan will mainly depend on your annual gross income (this is before taxes and expenses are taken out), less your monthly outgoings and expenses. These will include credit cards, student loan payment, loans for furnishings and car payments.

Once these expenses are taken into account, lenders work out how much of your income is being used for debt payments. If you have a higher ratio than 36%, the home loan may have a higher rate of interest or it may be refused. Lenders are more likely to grant you a mortgage, if your ratio is no more than 28%, for housing expenses.

Keep in mind that this is only a rule of thumb, and although the bank may agree to lend you a certain amount, it doesn’t mean that you can really afford it. However, it does offer you a guide to your price range when looking for a home.

If the calculation is not as high as you would have liked it to be, you will have to consider if there are ways you will be able to afford a more expensive mortgage, either by increasing your annual income, decreasing your monthly debt or increasing the down payment.

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