How Much Can You Afford?
To get a quick idea of what you can afford to spend, multiply your annual gross income (before taxes) by 2.5. For example, if your annual household income is $50,000, you might be able to qualify for a $125,000 home. This is just a rough estimate – the actual number will vary based on factors such as your debt and credit history.
Mortgage lenders typically use the housing expense and debt-to-income ratios to more accurately determine how much you can afford to spend on your mortgage.
Housing Expense Ratio
Mortgage lenders as a general guideline recommend that your monthly mortgage payment, including principal, interest, real estate taxes and homeowners insurance, should not exceed 28 percent of your gross monthly income. This percentage can change based on the type of mortgage you choose and sometimes the area in which you’re looking to buy.
Debt-to-Income Ratio
You should also factor in your other debts when determining an affordable monthly mortgage payment. Mortgage lenders look at whether your total debt is larger than 30-40% of your monthly gross income. Remember, debt is not just credit cards and student loans. It can also include alimony, child support, car loans, and housing expenses.
A mortgage lender, a housing counselor, or consumer credit counselor can help you better understand these guidelines. Before you talk to a financial professional, you can organize your financial picture by creating a budget. Don’t forget that you also have to save for the down payment, closing costs, inspections costs, moving, and other related expenses.
Read More at: www.coloradorealtors.com/affordability/
