How Much Can You Afford?
Determining how much “home you can afford” depends on several important factors including:
- Your annual gross income. You can get a very rough estimate of your affordable home price range by multiplying your annual gross income by 2.5. For example, if your annual gross income is $50,000, you may be able to afford a home worth $125,000 (this varies depending on current interest rates, your debt and credit history).
- Your credit history and score. Your credit can affect your ability to qualify for a mortgage and your mortgage rate. Before you shop for a house or a mortgage, find out what your credit score is by visiting www.annualcreditreport.com or calling (877) 322-8228. Be sure to do this only once a year because your score can be negatively affected if pulled too often.
- Current mortgage rates. Mortgage rates change constantly based on the economic factors that affect the demand for mortgages among investors like Freddie Mac. You can track mortgage rate trends by following Freddie Mac's Primary Mortgage Market Survey.
- The amount of your down payment. You will have to make a downpayment of at least 5 percent of the home purchase price to qualify for a mortgage that meets Freddie Mac’s requirements. If you are able to put down 20 percent or more, you can avoid having to pay private mortgage insurance (PMI), reducing your monthly mortgage payment.
- The type of home you are purchasing. If you are looking to buy a condominium, keep in mind that rates are typically higher for these loans and you’ll have to budget for the cost of your monthly condominium fee.
- Your current lifestyle and future plans. You should consider your current living standards, as well as any future major expenses such as a wedding or college tuition. And, remember – buy what you can comfortably afford today, not five years from now.
- Fees and closing costs. Remember to factor in the expenses and fees you will incur for a home appraisal, a home inspection and other professional services required to buy a home.
Key Ratios Lenders Use
To determine how much you can afford, it is helpful to follow the guidance and key ratios lenders use:
- Housing Expense Ratio. Lenders recommend that your mortgage payment (principal, interest, taxes and mortgage insurance) be less than 28 percent of your monthly gross income.
- Debt-to-Income Ratio. Lenders look to see that all your other debts (credit cards, student loans, alimony, child support, car loans and housing expenses) are less than 30-40 percent of your monthly gross income.
For More Information
Before you begin looking for a home, consider calling a HUD-approved housing counselor for free and confidential financial assistance. Housing counselors can help you determine how much you can afford and provide you with:
- Holistic credit education
- A confidential spending plan and debt counseling
- Debt repayment programs
- Financial management education
You may want to consult a professional financial adviser to help you set your financial goals. Also, take a look at our homebuying calculators to help you do the math.
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