How much house can I afford?
What factors help determine ‘how much house can I afford?’
Key factors in calculating affordability are 1) your monthly income; 2) cash reserves to cover your down payment and closing costs; 3) your monthly expenses; 4) your credit profile.
- Income – Money that you receive on a regular basis, such as your salary or income from investments. Your income helps establish a baseline for what you can afford to pay every month.
- Cash reserves – This is the amount of money you have available to make a down payment and cover closing costs. You can use your savings, investments or other sources.
- Debt and expenses – Monthly obligations you may have, such as credit cards, car payments, student loans, groceries, utilities, insurance, etc.
- Credit profile – Your credit score and the amount of debt you owe influence a lender’s view of you as a borrower. Those factors will help determine how much money you can borrow and the mortgage interest rate you’ll earn.
How much can I afford to spend on a house?
The home affordability calculator will provide you with an appropriate price range based on your situation. Most importantly, it takes into account all of your monthly obligations to determine if a home is comfortably within financial reach.
However, when banks evaluate your affordability, they take into account only your present outstanding debts. They do not take into consideration if you want to set aside $250 every month for your retirement or if you’re expecting a baby and want to save additional funds.
Home affordability begins with your mortgage rate
You will probably notice that any home affordability calculation includes an estimate of the mortgage interest rate you will be charged. Lenders will determine if you qualify for a loan based on four major factors:
- Your debt-to-income ratio, as we discussed earlier.
- Your history of paying bills on time.
- Proof of steady income.
- The amount of down payment you’ve saved, along with a financial cushion for closing costs and other expenses you’ll incur when moving into a new home.
If lenders determine you are mortgage-worthy, they will then price your loan. That means determining the interest rate you will be charged. Your credit score largely determines the mortgage rate you’ll get.
Naturally, the lower your interest rate, the lower your monthly payment will be.
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Ana speaks 3 languages (Portuguese, English, Spanish), Wife, Stepmom, Journalist, Event Director for the National Association of Hispanic Real Estate Professionals (NAHREP) Central MA Chapter.