How Much Home Can I Afford??
One of the most common questions I get asked as people begin their new home search is “what is the max purchase price that I can afford?”
My answer is always the same, “it depends.”
I get it. You want to know the cap so you are searching in the right price range, but there are many moving parts that will determine what you can afford and there are different lending guidelines depending on the loan product. Keep in mind that so many things impact your approvability, i.e. credit scores, down payment, occupancy, property type and whether you are salaried or self-employed. For the sake of this discussion, I’m keeping this strictly to affordability. So let’s dive in.
First and foremost, we look at your debt-to-income (DTI) ratio when qualifying. What is this and how is it calculated? Debt-to-income is the percentage of your gross monthly income that is allocated to all your monthly debts. We look at your monthly liabilities, including revolving credit card payments, student loans, car loans, etc., plus your new mortgage payment and divide that by your gross monthly income. We aim to keep this ratio of debts vs. income below 40%. For example, if you earn $10,000 a month, then your total monthly debt payments including the new mortgage should not exceed $4,000. So if you already have $1,500 in revolving monthly liabilities, then your new mortgage payment should not exceed $2,500. We work backwards from there to find the purchase price that would keep your payments around $2,500. However, we could never tell you exactly what the max home price you can afford is because the mortgage payment will be different depending on the property taxes of the home and/or association fees on various condos you may be interested in.
In the example above, I used 40% as the debt ratio we aim to keep you at or below. This gives us a buffer since most often we can actually go up to 45% and sometimes 50% with compensating factors like high down payment and excellent credit scores. Some government sponsored loans like FHA may even go higher but at a certain point you will become too much of a risk for the banks to lend. The entire profile of the loan is reviewed in order to make an underwriting decision, so there is no exact science to determining how much home you can afford. You’ll need to rely on the experience of your loan officer to help provide guidance.
Loan product can also impact how much home you can afford. The conforming loan limit is currently $453,100. Any loan amount over this is considered a jumbo loan, which has a different set of guidelines. Not only are debt-to-income ratios more strict on jumbo loans, but while somebody might be able to afford the monthly payment on a million dollar loan, they won’t find a program if they only have 5% down payment.
Payment SHOCK! Now that we’ve determined what you can qualify for on paper, you need to determine what you are comfortable with paying. There are various things we don’t account for in your debt ratio and you just might not be ready for the higher living expense. Maybe its day care or future private school tuition for you kids. Maybe it’s your lifestyle choices or hobby of collecting vintage wines. Or maybe… you were just living rent free with your parents and you’re about to take on a housing expense for the first time. Whatever it maybe, you may find yourself having “payment shock”, and regardless of what you may qualify for, at the end of the day it comes down to your level of comfort.
Give me a call for a free pre-approval. It’s important we have a discussion about your current and future goals as a homeowner so that I can help guide you towards the right price range that you don’t just qualify for, but you are comfortable with as well.
Written By: Chris Ulrich – United Home Loans
NMLS# 215735
