How Much House Can I Afford?
Congratulations! You're looking into buying your first home.
But maybe you've been stuck, asking yourself, "How much house can I afford?"
That's a tough, but important, question, and we'll do our best to answer it by covering the things you should keep an eye out for when considering buying a house. We'll also go over the things that your lender will look at when they determine how much money you can get for a home.
The first thing both you and your lender need to know is how much you're making a year. Your annual salary will be a primary indicator for how much you can borrow. But it isn't everything, and it's not the deciding factor.
There are a few other things that your lender will want to go over with you before deciding on a loan amount.
Going along with your annual salary, your lender will want to calculate your debt-to-income ratio. These calculations are used to determine how much of your salary is dedicated to paying other debts.
There are two ratios that need to be looked at to figure how much you qualify for:
- Front-End Ratio – This ratio is to figure out how much you can spend on your monthly mortgage payment, which includes the principal, interest, taxes, and insurance. A general guideline that lenders use is that your mortgage payment shouldn't exceed 28% of your monthly earnings. For example, if you made $4,000 a month, your monthly mortgage statement shouldn't exceed $1,120.
- Back-End Ratio – The back-end ratio is how much of your monthly earnings are already going towards other debts, including car payments, student loans, credit card payments, etc. Typically, your lender would prefer a back-end ratio of 36% or less. Using the same example as before, if you make $4,000/month, your maximum back-end ratio should have $1,440 or less going towards other payments.
Of course, 28% for a front-end ratio and 36% for a back-end ratio aren't numbers that are set in stone. They're actually just guidelines.
Depending on the lender, and other aspects of your financial situation, there may be times where you could still get approved for a home loan, even with higher debt-to-income ratios.
To put it simply, if you have a good credit history, then you're more likely to get a loan with a lower interest rate. However, if your credit score isn't where you want it to be, there are still some options you can explore:
- Get a copy of your credit history to see if there are any mistakes on it. Fixing mistakes will often improve your score.
- Wait to open any new lines of credit while you're shopping for a mortgage.
- Boost your score any way you can before getting a mortgage
Don't settle on mortgage rates that you qualify for if you can take steps to improve your options.
This one is all up to you. The lender requirements are a great starting point, but analyzing the things you spend your money on outside of debt can affect the mortgage you qualify for.
How often do you dine out? How much money do you spend on clothing? Do you spend a lot on vacations? These are the types of questions you can ask yourself to help determine what you'd be comfortable with for your mortgage budget.
It's not wrong to treat yourself by any means. But by analyzing your lifestyle, you can determine the things to cut back on in order to free up your monthly expenditures to get the mortgage you want.
Different Loan Options
Maybe you should explore some different loan options. Here is a list of some other loans that could possibly get you the mortgage you're looking for:
- VA Loans – VA loans are available to U.S. veterans, current servicemembers, and even military spouses. They are backed by the Department of Veterans Affairs and they offer low interest rates and great benefits.
- USDA Loans – USDA loans are backed by the U.S. Department of Agriculture. These are designed to make homeownership accessible in rural areas. If you live in a qualified area (and what the USDA deems qualified might surprise you), this could be a good option when shopping for a mortgage.
- FHA Loans – FHA loans are backed by the Federal Housing Association and they're designed to make homeownership a reality for individuals who can't qualify for a conventional mortgage.
Get a Pre-Approval
The best way to know how much house you can afford is to get a pre-approval. A pre-approval is different than a pre-qualification. Pre-qualification is an informal step while a pre-approval is a lot more formal and official.
To get pre-approved, you'll provide your lender with the necessary documents to determine your finances. When you get pre-approved, you'll be given a loan amount. While this amount isn't a guarantee, it will still give you the best idea at how much house you can afford.
Find Out If You Could Qualify for a Home Loan
Still feeling stressed? The loan officers at Elevate Mortgage Group are pros when it comes to answer the question "How much house can I afford?," and they're happy to discuss your specific situation. Just give us a call or message us online. We're here for you.