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Knowing How Much House You Can Afford

Making Sure You Can Afford Your Mortgage

Home ownership is a big milestone in many people’s lives. When you own your own home, you not only free yourself from paying rent each month, but you are also building equity. If you make your mortgage payments on time, eventually you will own your home outright and you will have a very large financial asset in your name. Plus, in general, real estate tends to increase in value over time, so buying a home can be a good financial investment.

However, if you buy more house than you can afford, you could soon find yourself in big financial trouble. After all, even though you won’t be paying rent every month, you’ll still be making regular mortgage payments. If you’re not able to afford these payments, you could find yourself taking on more debt just to stay afloat. You could even lose your home if you can’t make your payments.

Here are some tips for understanding how much you can afford when buying a home.

Know Your Budget

If you’re considering buying a home, one of the first things you’ll need to do is make sure that you have a budget. Writing a monthly budget will help you see how much money you need each month to afford all of your expenses. This will allow you to understand the type of monthly mortgage payment you’ll be able to afford.

Understand How Lenders Think

When it comes to how much money lenders will be willing to let you borrow, this depends on several factors. Different lenders use different qualification ratios to determine what sort of mortgage they will be willing to give you.

One possible method that a lender might use when considering your mortgage is determining the maximum monthly mortgage payment you can afford. Most lenders believe that your monthly mortgage payment should not exceed 28% of your gross monthly income (this is your income before taxes.) That means if you and your partner earn a combined $80,000 a year, your monthly mortgage payment should be $1,866 or less.

Another ratio that lenders may use is called the Gross Debt Service Ratio. This refers to how much of your gross income it will take to afford your monthly housing costs (mortgage payments, home insurance, property taxes, condo fees, etc.). In general, the amount you spend on monthly housing costs should not be more than 32% of your gross income. (That means $2,133 per month for a couple making $80,000 a year).

Another important ratio that lender may take into account is your Total Debt Service Ratio. This refers to the cost of all of your debt payments. In most cases, lenders want you to spend no more than 40% of your gross monthly income on paying down your debt, including your housing costs. As you can see from this last calculation, this means that having more debt will make it more difficult to get a mortgage.

Understand Your Debt

Before you purchase a home, you’ll need to have a good idea about your debt situation. This means knowing how much debt you owe, understanding how much you pay on your debt each month, and having a plan for reducing your debt. The more debt you have, the more difficult it becomes to afford a monthly mortgage payment.

If you have a large amount of debt, you may want to focus on paying it down before you buy a home. Not only will this make managing your personal budget easier, but it will also help you get a mortgage from a bank or other lender.

Plan for Emergencies

Unexpected situations happen to everyone. You might lose your job, become too sick or injured to work, or be faced with another sudden situation that affects your ability to earn an income. You may also find yourself dealing with an unexpected expense. For instance, your car may break down and you’ll need to make a major repair, which can be very costly. If you don’t have an emergency fund, these unexpected situations can cause you to go into debt to make ends meet.

When you’re thinking about buying a home, it’s a good idea to look at your overall financial situation first. The stronger financial ground you’re on when you buy the home, the greater the likelihood of you being able to make your payments and stay out of money trouble.