When you start thinking about buying a house, one of your first considerations will likely be affordability – can you afford a house payment on top of whatever debt you already have? We’re here to help with a few answers and a few ideas.
Can You Afford It?
First, can you afford a house with your current expenses and debt? There’s a lot of “rules of thumb” out there but the one we think makes the most sense is that your new mortgage related debt should be no more than 28 percent of your pre-tax monthly income. “Mortgage related debt” means the combined amount of your mortgage payment, property taxes and homeowner’s insurance. Keep in mind that homeownership also involves home repairs and upkeep – which can add up. If you can forgo using this amount to pay a mortgage and housing related expenses and not fall behind on your other debts, this is a good indication that you’re on the right track toward home ownership.
How Much Do I Have To Save?
How much do you have to save for a down payment and closing costs.
When mortgage people look at your debt to income ratio (DTI) they generally want to make sure you’re not spending more than 43% of your gross (before taxes) monthly income on debt. Their calculation goes something like this:
(Current Monthly Debts + Potential Housing Payment) ÷ Monthly Pre-Tax Income = DTI
So to answer the "how much to save" question, you'll need enough so that your DTI falls (in a perfect world) below the 43%. Keep in mind that amount will change depending on the purchase price and the down payment you will be using.
When you’ve got your debt and expenses under control, you should start thinking about saving for your down payment. How much you’ll need depends on the price of the home you’re buying and the kind of financing you will be using to buy it. Conventional mortgages generally allow for 5%, 10% and 20% down payments while FHA mortgages require 3.5%. Your mortgage loan officer is a great asset for you and will be able to guide you through the financing process and point you in the right direction in regard to how much of a home you will be able to afford.
We're On Your Side!
As your real estate agent, we will work hand-in-hand with your loan officer to make sure that from the kernel of the idea to buy a home straight through to the presentation of keys, your home finding and financing process will go as smoothly as possible.