How Much Can You Afford To Spend On Your Home? 5 Tips to Figure It Out
How much home is too much?
You might say “there’s no such thing,” but banks and mortgage lenders are apt to disagree. That’s why it’s important to find a home you can afford before wrestling with the bank employee about the six-figure mansion atop a mountain.
Curious how much you can afford? It’s time to find out.
Use our five handy tips to see just how much home might be too much (or too little) for you.
1. Analyze Your Budget
The best way to see how much you can afford is to analyze your budget. More than anyone else, you know what expenses you can tack on and still eat.
Sit down and make a list of your monthly income. Subtract your monthly payments to see how much you’d be comfortable shelling out for a house. Your rent is an excellent indicator of this if you’re unsure.
Next, plug the number into a mortgage calculator, which will provide an estimate of the loan size you can afford.
2. Ask the Bank
You can always speak to a representative at your bank. He or she will calculate your debt-to-income ratio.
The great thing about using the bank is they don’t care about the dream house you’ve been eyeing. Based on your annual income and debt, they’ll provide the maximum amount you could afford to spend on a mortgage payment.
Keep in mind, however, they provide the maximum amount. A good rule is to go well below their recommended number.
3. Use an Online Calculator
The web is full of online calculators that will determine your monthly payment based on a mortgage payment amount. For instance, if you think you could afford a $250,000 house, it will deduce how much your monthly payments would be.
These calculators are also useful because they break down the payment itself, letting you see how much goes to insurance, property taxes and other fees.
NerdWallet’s calculator even lets you select a location to provide the most accurate estimates.
4. Find Your Back- and Front-End Ratio Maximum Payments
In assessing the monthly payments you can afford, you created a decent understanding of finances. However, finding your back and front-end ratio maximum payments digs a tad deeper.
The back-end ratio shows your debt to income ratio. Take your annual pre-tax income, divide it by 12 and multiply it by your lender’s back-end ratio. Subtract your monthly debts to find the ratio.
Your front-end ratio indicates what portion of your income goes to mortgage payments. To discover this amount, divide your annual income by 12, then multiply it by your lender’s front-end ratio. This is your total mortgage payment.
Whichever calculation is lower is a good indicator of what a lender will assume you can afford.
5. The 43% Rule
Many prospective homeowners will use FHA loans to purchase their house. The FHA requires a 43% or lower debt-to-income ratio. However, 38% is optimal.
To find this percentage, divide your monthly debts by your monthly income. This is a great indicator of whether you’re ready to purchase a home and how comfortable you’ll be having heftier payments.
Find a Home You Can Afford
Finding a home you can afford is complicated and difficult. But we’re here to help with all the research.
Our site offers articles on every topic you could name about FHA loans and home-finding. And if you’re considering becoming a homeowner, you’d do well to check out our article about finding a home within your budget.
Don’t get discouraged on your search. The perfect home is waiting.