How Much House Can I Afford?

Everyone wishes for a dream house. Individuals, couples and families start fantasizing about their dream house since the beginning of their family life. Almost every person desires to become a homeowner. Buying a real house is not only an emotional decision; it involves a lot of financial evaluation and assessments.

Buying a home is one of the major investments that a person plans in a lifetime. Once you decide to buy a house, the very next step should be a wise and a realistic calculation of your financial resources.

How Much House Can I Afford

Calculating House Payment

Before you go for the house hunt, you have to come up with a realistic answer to this very important question, “What price can I afford?’’ A savvy buyer will always go for a comfortably affordable buying plan. The ownership of the house should not put a constraint on your other goals in life such as education, health insurance, vacation time, etc. Before becoming a new homeowner, one must calculate their monthly expenses and debt and subtract that from their annual income.

You can use a mortgage calculator that takes into account your income, down payment and recurring monthly payments to estimate the price of the home you can afford. This will help you in estimating a payment that is reasonable and comfortable to afford. It is always a good idea to calculate what you can afford by analyzing your own financial position. You are the best judge to evaluate how much you can afford comfortably.

Prequalify for a Loan Before Buying

A mortgage lender can help you pre-qualify for a loan and give you an estimate payment plan that you can afford. However, a real estate professional can give you a broad overview of the real estate purchase transaction and everything involved in its process. Hiring a real estate agent can help your streamline what you can afford, which areas you can afford, and how to protect yourself when purchasing property.

What is Debt to Income Ratio?

Every mortgage lending agency has its own debt to income or DTI limit. However, all leading lending agencies conform to Federal Housing Administration (FHA) limits. The front-end DTI ratio for an FHA loan is 31% and the back-end DTI ratio is 43%.

Front-end-ratio is calculated by dividing the housing related costs with your gross monthly income. The front-end DTI ratio indicates a reasonable payment that you can afford. Front-end-ratio is the percentage of your gross monthly income that you will spend on the mortgage payment, property taxes, insurance and interest. You can always decide your own front-end ratio to give yourself a comfortable payment level catering your financial situation.

Back-end-ratio is calculated by dividing all housing related costs plus all recurring monthly debts with your gross monthly income. The back-end ratio is higher; for an FHA loan, it is 43%. Back-end-ratio will take into account all recurring debts, including car loans, student loan payments, credit card payments, child support obligations and any other recurring debts you have.

Essentially, with this information you can calculate how much of a mortgage payment you qualify for, which gives you an idea what home sale price you can afford.

Down Payment for Home

The amount of your down payment depends on the type of loan and your credit rating. The more money you put down, the lower your monthly payments will be. FHA and VA loans offer as little as 3% down payment for a loan. Many conventional loans require at least 20% down payment. The amount of money that you are ready to put down also depends on many factors such as your savings and debts. It is advisable that after a down payment, you have enough reserves with you to cover any unforeseen financial emergencies and unexpected repairs.

The final home price is usually greater than what you expect considering all the financing costs such as interest, closing costs, insurance, and taxes. These should all be taken into consideration while calculating the financing of your house purchase.

Calculating House Payment


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