If there’s something nudging you about finally becoming a homeowner, one of the first things you’ll want to know is how much house you can afford. Once you start your search, it’s easy to become overwhelmed about not just the number of properties for sale but also the wide range in pricing. What is the price range you need to be looking into and how do you know how much you can qualify for? It’s a combination of income, credit, rates and loan amount.
How Much House Can I Afford? Here’s How to Figure it Out
How Much Should Your House Payment Be?
When lenders view income, they look at gross monthly income, not “take home” pay. This is a universal approach that mortgage companies employ. They also compare monthly debt, including the new mortgage payment plus property taxes, insurance as well as other monthly credit obligations like minimum credit card payments, automobile loans and student loans. Lenders like to see the total mortgage payment be around 33 percent of gross monthly income and 41 percent of gross monthly income when combined with other debt.
How Much Are You Comfortable With?
So, if you make $6,000 per month, one-third of that would be $2,000, or the ideal amount allotted for your house payment. $2,460 is then set aside for all monthly debt. These are guidelines, and there is some “wiggle room” with these debt ratios, but they do give you a start. Note, just because these debt ratios say you can comfortably qualify with a $2,000 per month house payment that doesn’t mean you have to borrow that much. If you’re more comfortable paying $1,500 per month—maybe that’s what you’re now paying in rent—then use $1,500 as your suggested payment.
What Credit Score Do You Need?
Okay, so how’s your credit? All mortgage programs today require some sort of a minimum credit score. This minimum score can vary based on the type of loan program and the amount of down payment you have available. These scores are commonly called FICO scores because the original algorithm was developed by the FICO Company, and they range from 300 to 850. Most score minimums fall in the 600 to 620 range, but the average score is closer to 680. FHA loans for instance ask for a minimum score of 580, while conventional loans might ask for a 660 score. Note, lenders can set their own credit score guidelines as long as they meet the minimum requirements for the loan program. This will impact your interest rate, which will also play a significant role in how much house you can afford.
How Much Should Your Down Payment Be?
Next, how much should you put down? Perhaps the better question might be, “How much do you have available for a down payment?” You’ll want to speak with your loan officer about your loan options. Based on a series of questions, you will be provided with several loan options. If you want a low down payment loan, one of the government-backed programs like a VA, FHA or USDA loans might be a better choice. If you can put down 10 percent of the sales price or more, maybe a conventional loan works in your favor. This can go a long way towards answering the question of how much house you can afford. But bear in mind that at Homesite Mortgage we offer various low or no down payment programs. Call us today at 855-225-9827 to learn more.
Do You Have Existing Home Equity?
Do you currently own a home? Consumers who buy their next home often benefit from the equity built up over time. When the home is sold, the previous mortgage is paid off and closing costs have been paid, those funds are available to be used for your new down payment and closing costs. Or, a down payment can be made up of proceeds from the sale of your home plus funds in your checking or savings account.
This is a good way of figuring out how much house you can afford before you go to the bank. But before you get too much further into the process, you want to get preapproved for a home loan. This can be done by completing our online application and submitting it to your loan officer. With a preapproval in your hand, you’ll have a better idea of how much house you can afford.