Affordability is often more complicated than a simple mortgage calculator. We discuss the elements that go into determining how much a buyer can afford.
Besides your income there are a lot of different aspects to consider before purchasing a home. Major life events can come into factor and can change your whole financial budget in the blink of an eye. Listed below are several considerations that can change your home affordability and ways to combat them.
Major Life Events: Having children, letting your parents move in, and changing jobs can significantly impact your budget. Kids are pretty expensive and although parents may help contribute to monthly payments, other health care costs may arise. Changing jobs, although it may increase your income, is not a good idea when going through the home-buying process because it could be a red flag for some mortgage lenders.
Location: Deciding where you want to live is one of the most important factors when considering buying a home. Depending on location, home prices vary. You can afford much more house if you live in Cleveland than you can if you live in Los Angeles. Certain neighborhoods can have HOA fees and property taxes. Commuting to work is another factor that can change your monthly expenses.
Debt-to income (DTI) ratio: This is one of the first things that lenders analyze. This ensures you will have enough income to cover your mortgage payment and other debts. Typically, your DTI should not exceed 26 percent.
Savings: A good rule of thumb is to have between 3-6 months of savings piled up for your expenses. For home repairs, you’ll also spend between 2.5 to 3 percent of your home’s value annually. Being debt-free is ideal, but not always realistic. Make sure you’re paying your credit card debt and other loans on time to improve your credit score. Don’t apply for any credit a year before you apply for financing.
Take these ideas into consideration when you are planning out our financial budget. To help you, here are three rules mortgage lenders usually abide when evaluating your income:
Rule of 28: You can determine your monthly mortgage payments by taking out 28 percent of your gross annual income. If you and your spouse have an annual income of $80,000, your monthly mortgage payment should not be more than $1,866.
Rule of 32: This next rule examines your total housing payments (including mortgage, insurance, property taxes, HOA fees, etc.). This amount should not exceed 32 percent of your gross monthly income. Meaning, for the same example as above, the total housing payments should not be greater than $2,133 per month.
Rule of 40: Last, your total debt combined should not exceed more than 40 perfect of your gross monthly income. This includes car payments, student loans, and credit card debt. Using the same example as above, the couple’s total monthly debt payments should not exceed $2,667. If they pay $500 for other debts, their monthly mortgage would be topped at $2,167.
If you have any questions about being able to afford a home or would like some expert advice from one of our mortgage advisors, hit the live chat button now or call 1-844-778-5626.