One of the principal questions that most of the prospective homebuyers have is ‘how much house can I afford?’ in reality. It is a fact that housing prices are low in 2010. But, it is also true that thousands of homeowners are losing their cherished homes to foreclosure. That is why it is necessary to know whether you can really afford to buy the house so that you don’t have to go through the humiliating process of foreclosure.
Ways to determine how much house you can afford:
The easy and effective ways to determine how much house you can afford are given below:
- Housing expense ratio: The housing expense ratio, also known as front-end ratio, is the percentage of your gross monthly income that will go towards paying your mortgage/ housing expenses. A major portion of your payment will go toward loan principal and interest (P+I).Your housing expenses have to be within 28% of your gross monthly income. However, a portion of your housing expenses will also include property taxes (T) and homeowner’s insurance (I). Thus, your total housing expenses can be represented as P+I+T+I. This is a smart way to know ‘how much house can I afford’ easily.
- Debt-to-income ratio: Your debt ratio is the total of your P+I+T+I and any other debt expenses divided by monthly gross income. Debt ratio will evidently be of higher percentage, as majority of people have credit card debt or other loans. Normally your debt ratio ought to be less than 36%. For example: If your monthly gross income is $5,000, then your total debt expenses must not be more than $1,800.
- Down payment: If you can’t afford to put down at least 20% of the home purchase price, then you will be required to buy a private mortgage insurance (PMI). Therefore, check whether you can make the required down payment.
- Home maintenance expenses: Most of the first time homebuyers don’t think about this but the fact is you will have to keep some spare cash for home maintenance cost. You will also be required to keep some extra cash for unforeseen expenses such as appliances break down, replacing carpets, renovating kitchen, remodeling bathroom, and etc. So check whether you can afford to bear those expenses.
Finally, the homebuyers may also be required to pay Homeowner’s Association Fees. So, another way to know ‘how much house can I afford’ will be to figure out the amount of money you have to spend towards Homeowner’s Association Fees.