Buyer Tips: Deciding How Much Home You Can Afford
In today’s economy, a growing number of home-buyers are interested in purchasing Warner Robins homes they need to suit their lifestyle and future plans rather than viewing the purchase as an investment toward their future. For this reason, most buyers want to know how much home they can afford to purchase without putting themselves in a difficult financial position. “While the general rule of thumb is that most home-buyers can afford to purchase a home that costs anywhere from two to two-and-a-half times their gross annual income,” explains Bethesda Realtor Kevin Koitz, “There are many other factors that should be considered when deciding how much home you can afford.“
While you may feel comfortable spending a certain amount of money toward the purchase of a home, you also need to consider whether or not you will actually qualify for a loan. When determining whether or not you qualify, lenders consider two things: the front-end ratio and the back-end ratio.
Also referred to as the housing expense ratio, the front-end ratio is a figure that represents the percentage of your gross monthly income that will go toward repayment of your mortgage loan. In general, lenders want this figure to be less than 28 percent, although some may allow it to be 30 percent or higher. Finding a lender who is willing to accept a ratio of 40 percent or higher in today’s economy can be quite difficult, if not impossible.
The back-end ratio, also known as the debt-to-income ratio, is a figure that represents the percentage of your gross monthly income that will go toward paying all of your debts. This includes your mortgage as well as car loans, student loans, credit cards, child support and other forms of debt. Most lenders will want this figure to be less than 36 percent, though others will allow it to be 40 percent or more.
Helping you determine how much home you can afford is part of what lenders do! Be open and honest to avoid pitfalls down the road and ensure they accurately determine your spending power.
Exploring Loan Options
When determining how much you can afford for a home, you also need to consider the various loan programs that are available. In the most general terms, there are three options available: conventional, FHA and VA.
Most home-buyers choose to obtain a conventional loan, which generally requires a down payment of at least 10 percent and may require a down payment of up to 20 percent. You will also need to have a solid credit score to obtain this type of loan. FHA loans, which are issued through the Federal Housing Administration, require down payments as low as 3.5 percent and typically offer more flexibility in terms of the credit score. Those who are currently serving or who have previously served in the military may qualify for a VA loan, which is issued through the U.S. Department of Veterans Affairs. These loans do not require a down payment and you will not be required to obtain private mortgage insurance.
Considering Other Costs
According to real estate agent Ray Nemec, “Many potential home-buyers fail to consider the other costs that are associated with home ownership.” When obtaining a mortgage loan, for example, you will find that you have to pay costs in addition to the price of the home. These include taxes, insurance and closing costs. Other expenses to consider include maintenance costs, association fees, utilities, furniture and other costs.
The bottom line is to do your homework and decide how much home you can afford before jumping in feet-first. Taking this necessary step will save you stress, funds, and ensure you find the right property at the right price for your needs.