New Home: How Much Home Can I Afford?

Researching and purchasing a new home is time consuming, nerve racking and exciting. The entire process can take more than a year and is often one of the biggest events in life. For many of us, buying a new home is both the beginning of a new life and a major accomplishment. For all of us, it’s important that we can comfortably afford our new home. So how can you determine how much home you can afford and how do lenders determine how much home you can afford?

What you can afford typically depends on your credit score, income, interest rate, down payment and current monthly bills; together these variables help determine your interest rate.

1. Credit Score – Lenders use your credit score to determine the amount of risk they are incurring to lend you money for a new home. If you have a high credit score, you are likely a person that values your credit and paying your bills on time. Creditors are assuming less risk by lending you money and will lend you money at a lower rate of interest.

2. Income – Your income is another indication of home much more you can afford. Lenders use your income less your monthly bills to determine your DTI or debt to income ratio. A debt to income ratio less than 40% is attractive.

3. Interest Rate – The interest rate you receive on your home loan is contingent on market factors, your down payment, credit score and debt to income ratio. If you have money to put down, a high credit score and a low debt to income ratio then you are a low risk borrower and will receive a lower interest rate. Low interest rates decrease your monthly mortgage payments and allow you to meet the expense of a more costly home.

4. Down Payment – Putting money down on your new house decreases the amount of your total loan and shows lenders that you have the ability to save money each month. In addition, by putting money down you may qualify for lower interest rates because lenders are lending you less money than your home’s market value. This means that if you default on your loan, lenders are more likely to recoup their investment because the principal on the loan is less than the home’s total value.

5. Current Monthly Bills – You can easily take your income and minus your monthly bills to determine if you can afford a new home. Lenders do the same during the loan process but if you do it yourself or get prequalified by a lender, you could save valuable time by only looking for homes within your budget. Make sure you include monthly expenditures for eating out, entertainment, gas, clothes, etc. so that you have an accurate estimate of what you can afford.

Discovering how much home you can afford before you start searching, can save you and the professionals you deal with time and money. Loan Officers and Real Estate Agents are great resources to consult with when trying to determine what you can afford. They know many of the costs associated with moving and financing, and can make you aware of any unexpected costs.