Everybody nurtures a dream of buying a new home. But before buying the house, you must take some time to ask yourself a simple question, “How much house can I afford?” Once you know how much you can afford, shopping for a home loan that is within your budget is much easier to do. Getting a home loan beyond your budget can lead to a foreclosure if you fail to make regular monthly payments. Consider the 4 factors that help determine how much house you can afford.
1. Check your credit history: Your credit history is a major factor that is taken into consideration by the lender who decides the interest rates, monthly payments, terms and conditions of the mortgage. Therefore it is always advisable to clean up your credit report before applying for a mortgage so that you can get an affordable one.
2. Check your affordability: When “How much house can I afford” is the question that haunts you, then calculate your affordability with the help of the housing expense and the debt-to-income ratio.
b) Debt-to-income ratio: This ratio shows how much of your gross monthly income goes towards paying all your debt obligations, including credit card debts, car loans, child support, alimony and educational loans.
3. Determine your down payment: The lenders will expect you to put down 10- 20% of the home loan amount. It is often seen that if you fail to put down at least 10-20% of the loan amount, you become liable to pay PMI (Private Mortgage Insurance), which increases your monthly payments. Therefore save money for the down payment and eliminate the need for PMI.
4. Understand your options: Understand the options of various types of mortgages. With a fixed rate mortgage, you can reap the benefits of fixed monthly payments. On the other hand, with an adjustable rate mortgage, you may get a lower initial interest rate but it may rise with time. Therefore choose wisely according to your affordability.
So, if the question “How much house can I afford” is troubling you, then consider the above mentioned options so that you can make the best choice.
About the author: Quest blogger Steven Robart.