How Much House You Can Afford
There
are a number of factors that can contribute to the affordability of a house
and, as a potential homebuyer, it’s important that you know what type of
mortgage payments are within your budget.
Debt-To-Income
Ratio
As
a homebuyer, your first consideration will be the amount of your monthly
mortgage payments. If you owe a lot of
debt, lenders may consider you to be a high credit risk, which makes
debt-to-income ratio a leading factor in determining how much of a house you
can afford.
Most
lenders will discount any loans that you will have paid off within one year
when determining how much of a home you can afford. As a general rule, your mortgage payment
should not exceed 25-30 percent of your monthly take-home pay.
Loan
Term
Although
you will end up paying more interest in the long run, you will find that you
can afford a more expensive house if you request a loan term of 25-30 years,
compared to a shorter term of 15 years.
Interest
Rates
When
you look at an interest rate, all you see is a number. Hopefully, it’s a single digit that’s
comparable with current market rates.
Most homebuyers already know that their interest rate affects their
monthly payment which, in turn, is determined by the borrower’s income. Lower interest rates mean that you can afford
a larger principal loan amount, which means a more expensive house.
Credit
History
Because
your past credit history will play a large role in determining your interest
rates, it will also impact the affordability of a house. For instance, a buyer who pays six percent
interest will save a considerable amount of money over a buyer who pays eight
percent interest on their home loan. It
may not seem like much now but, when averaged over time, the savings could be
tremendous.
Down
Payment Amount
Believe
it or not, the amount of your down payment will not only show the lender how
serious you are about buying a home, but it will also affect your ability to
afford a particular house. For instance,
if you were to qualify for a home loan of $200,000, but your dream home was
currently listed for $250,000, a down payment in the amount of $50,000 would
get you into the home.
The
above scenario is just an example, but it does show how a down payment can
affect the price of the home that you are able to afford. Some lenders may only require a five percent
down payment, but you are free to pay as much above that as you wish. A larger down payment can also reduce the principal
loan amount, which thereby reduces the monthly mortgage payments.