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.