The process of looking for a home is an exciting one; however, it is also important for people to know how much house they can afford. There are numerous factors that people need to consider when it comes to looking for a home.
Household Income and Stability
Some of the most important factors that people need to keep in mind include their household income, their monthly debts (such as a student loan or a car loan), and the amount of money available to put down. The trick when it comes to looking for a house is stability. This is what the bank will want to see because they are trying to minimize the amount of risk they will take on. The income for a household is probably relatively stable and most of the debts are locked in (in the form of a repayment plan). On the other hand, a large unexpected expense (such as a medical bill or a car repair) can really eat into a family’s savings. This impacts the down payment. One of the best guidelines that people should follow is that they should have three months of payments (for house payments and loan payments) in reserve. This ensures that families can cover the mortgage in the event that something unexpected happens.
Debt to Income Ratio
Now, one of the biggest factors that will play a role in how much house someone can afford is something called the debt to income ratio. This is one of the most important metrics that the bank will look at when it comes to approving someone for a loan. The credit score is going to impact the ratio for which someone will qualify. If someone has a higher credit score, the bank is more likely to allow someone to take on more debt in reference to their income than someone with a lower credit score. As a good rule of thumb, the added housing expense should not exceed 28 percent of someone’s monthly income. For example, if someone has a monthly income of $4,500 before taking out taxes, 28 percent of this number is $1,260 per month. That should be the target mortgage payment. At the same time, those who already have a lot of debt (or who have a lower credit score) might not be approved for this same percentage. The bank might only give out 25 percent instead of 28 percent.
In addition, people also need to consider the other expenses that come with owning a home. The two other expenses that someone will have to assume are home insurance and real estate taxes. Often, the lender will take payments for real estate taxes, holding it in escrow. This is usually tacked onto the mortgage. The lender may also provide an offer for home insurance, but homeowners should still take the time to look around and make sure they are happy with the offer. Both of these expenses still need to be factored into the monthly expenses that go with the home.
Mortgage Structure and Interest Rates
Finally, the structure of the mortgage itself is also going to play a major role in the final cost of the home. The biggest factor that people need to consider when looking at a mortgage is the interest rate. The lower the interest rate, the better the loan. Even a single percentage point can save someone thousands of dollars. Often, banks negotiate in terms of ¼ percentage points. This simply goes to show just how important these percentage points are. It is important to work with trained professionals to make sure that everyone understands how their mortgage is structured.
These are a few of the most important points that people need to keep in mind when they are looking for a home. While this process is supposed to be fun, people need to make sure they can afford the home they end up purchasing.