How Much Home Can I Afford To Buy?

Everybody wants to have a home of his own. But the question is “how much home can I afford”. It’s important to consider affordability before signing any purchase contract.

Things to consider before buying a home:

Any first time homebuyer often thinks “how much home can I afford”. He needs to look at the following factors :

• Debt ratio: You should look at your gross monthly income before taxes (how much you earn per month, not how much you take home) and other expenses.
• Front-end ratio: It is the percentage of your gross monthly income to monthly housing expenses. From a lender’s point of view, it reflects the payment a buyer can easily afford. Usually for a conventional loan, the front-end ratio is 33%.
• Back-end ratio: The back-end ratio shows your new mortgage payment, and all recurring debt. It is also calculated on your gross monthly income. Normally, it is higher than the front-end ratio. For a conventional loan, it is 45%.
• Home sales price affordability: You need to figure out your monthly housing payment. If you can’t make at least a 10% down payment, you will also have to pay private mortgage insurance (PMI).
• Transport: The buyers who are moving from the city to the suburbs should include in their budgets the total cost for two cars (loan payments and insurance). It needs to be included in the budget since transportation consumes a large chunk of a suburban family’s paycheck.
• Extra’s: First time homeowners may be surprised to know that they have to pay for a handful of other services beyond basic utilities, including garbage disposal, water and sewage.
• Down payments: It depends on various factors:

a) No down payment: If you do qualify for 100% financing, then your down payment will be zero.

b) Down payment for FHA loans: These down payments are currently 3.5% of the sales price.

c) Conventional loan down payments: Any loan that is more than 80% of the sales price will need you to pay for private mortgage insurance policy, which will increase your monthly mortgage payment. Usually down payments are 5% to 15% of the sales price.

If you analyze these factors then you will get the answer to your question “how much home can I afford” Any first time homebuyer needs not to buy the most expensive home at the first oppurtunity.

We’d like to thank Miss Sue Lang VEC on this great article.