Despite the rewarding benefits, you get from it, buying a house is not easy. It is probably the single biggest financial commitment you will make in your life which takes careful planning ahead of time. From gathering the finances to going house-hunting, there are several things you have to consider to have an enjoyable and successful homebuying experience.
However, the one question many homebuyers ask themselves when going house shopping is “how much house can I afford to purchase the home of my dreams?”
In general, when you are buying a home, you will need to consider more than just your personal finances. In fact, there are various factors that can affect your affordability, from your debt-to-income ratio to mortgage rates, all of which must be evaluated in advance before you start looking for your new home.
In this post, we outline the five most important factors to consider when determining how much house you can comfortably afford.
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Your monthly income and budget
Obviously, your monthly income and budget are the starting point you have to consider when determining how much you can afford. You will have to take a closer look at your household income and figure out how much realistically you can use for your mortgage payment each month.
Keep in mind that this payment will only be one of the several other monthly expenses you will have, so it is important that you have enough income left to cover those other expenses. Some of the basic ones include utility bills, travel expenses, childcare, food and groceries, and insurance policies.
Another factor that you should take into account when determining your home affordability is your lifestyle. In other words, you need to first figure out your and your family’s personal needs and priorities to see how much you can afford for a new home.
For instance, are you moving houses because your family is growing and you need a bigger place? Or, is being closer to the best school in the county worth spending more money to cover the higher property taxes?
These aren’t easy questions to answer and you need to consider them while you are on your quest for a new home.
Your debt-to-income ratio
Your debt-to-income ratio is the next important factor that impacts how much house you can afford. This ratio is usually calculated by mortgage lenders to see whether you can be approved for a mortgage on your new house. The general rule is the lower your DTI is, the higher chances you will have at getting approval from mortgage lenders.
If you want to calculate your current DTI ratio, all you have to do is add up your monthly debt such as your rent payments and phone bills, and divide it by your gross monthly income. If a considerable percentage of your monthly expenses go toward debt payments, then that could certainly reduce your chances of getting a favorable home loan.
Your credit score
Your credit score is another factor that can affect your home’s affordability. The score is also calculated by mortgage lenders to see how responsibly you manage your finances. A high credit score gives you more access to better borrowing opportunities, while a low one can make it harder to borrow at all.
So, if you want to get approved for a home mortgage, make sure you know your credit score and the main factors influencing it which are your payment history, amounts owed, age of accounts, new credit applications, and types of credit use.
Current real estate market
Even if you have all of your finances in order, it is important that you also consider the current housing-market economics, either in the area where you are looking to buy your home or the one where you are planning to move.
When examining the current real estate market, you have to think about several things including whether you want to rent or buy the property, what the interest rates are, what time of the year you are going house-hunting, and the location of your new home. Because this can be quite complex, you may have to consult with a real estate agent to guide you along.
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Buying a home is an expensive investment and many things must be taken into consideration before starting the process of house-hunting. From taking a closer look into your personal income to examining the current housing-market economics, it is important that you understand the main factors that impact your home’s affordability.