How much house can I afford? It’s the question that both first-time buyers and current owners are curious about once they decide that it’s time to make a move! While there are many factors that go into deciding your max budget for a new house, you can plug in some simple numbers to see where you stand from a lender’s perspective.
Why is it important to know how much house your budget allows for? With the market being as competitive as it is, it’s important not to waste time looking at homes that aren’t in your range. Knowing what you can afford can help you to do targeted, realistic searches where you’re actually in a position to make real offers! Take a look at an easy guide to finding out how much house you can afford today!
Here’s How to Calculate How Much House You Can Afford
When determining how much home you can afford, you’re really looking at how much lenders are willing to let you borrow. While you don’t have to take out a loan for the maximum amount you’re approved for, this is a good starting point. The big thing that lenders are looking at on your mortgage application is your debt-to-income (DTI) ratio.
DTI is determined by dividing all of the monthly debt/living expenses you owe by your gross monthly income. The “nutshell” explanation is that they’re looking at your money in compared to your money out. The reason lenders do this is that evidence from studies of mortgage loans suggests that borrowers with higher debt-to-income ratios are more likely to run into trouble making monthly payments.
What DTI do mortgage lenders like? The preferred DTI among lenders is no more than 36 percent. That means that no more than 36 percent of the money you earn every month is “claimed” by expenses. This isn’t a cut-and-dried answer because some lenders are okay with DTIs as high as 43 percent. Keep in mind that your overall financial health, including your savings, credit history, and available down payment, will also help to determine the size of the home loan you’re approved for by a lender. Even your mortgage term (15, 20, or 30 years), mortgage interest rate, and personal reserves are going to determine the size of the loan you can get. The record-low interest rates today work in your favor in this regard!
Now, lenders also like to see a housing-specific DTI of 29 percent. That means they don’t want to provide you with a mortgage with monthly payments that will total more than 29 percent of your monthly earnings. To get your housing DTI, add your principal, interest, property tax, and home insurance payments together before dividing the sum by your gross monthly income. Your gross income is the sum of your wages before taxes. You can turn the number you get into a percent by multiplying it by 100. Next, plug in your own numbers to see how much house you’d qualify for today based on your own DTI.
Step 1: Tally up all of your monthly expenses:
- • Rent/housing payments.
- • Auto loan payments.
- • Student loan payments.
- • Monthly credit card minimums.
- • Child support payments.
- • Private loans.
- • Grocery bills.
- • Utility costs.
- • Taxes.
- • Other payments.
Step 2: Divide the total that you get from all of those costs by your monthly gross income. Let’s say all of your debts total $1,000 per month with a gross income of $4,000 per month. Divide $1,000 by $4,000 to get a DTI of 0.25 (25 percent).
While this is a very simplified way to determine how much home you can afford, it’s a great place to start. The next step is talking to a real estate agent about finding a home in your price range here in Arizona! Stevens Realty can help you explore beautiful properties that make all the numbers work. Reach out to Keith and Janna today!
We are Keith and Janna Stevens, and we’ve been in the realtor game for years now. We’ve learned a lot along the way and want to share that experience with you. Enjoy our blog, and when you’re ready to buy or sell your home, be sure to reach out to us!