How Much Home Can You Afford?
As many homeowners discovered during the recent economic downturn, simply qualifying for a home mortgage loan does not mean you are financially ready to take out a loan. Therefore, before you take the plunge into homeownership, it is important to consider how much home can you afford. When making this decision, it is a good idea to consider the factors that are used by mortgage lenders when determining how much of a loan you can receive. In addition, you must take an honest look at your financial situation when deciding if now is the right time for you to buy. How much home can you afford? It depends!
How Do Lenders Determine How Much You Can Borrow
When deciding how much to lend you, lenders consider three primary factors. These include:
- Front-End Ratio
- Back-End Ratio
- Down Payment Percentage
Your front-end ratio is a monthly percentage based on your yearly gross income and the anticipated monthly payment associated with your loan. Your monthly payment consists of the principal payment toward your loan as well as interest, taxes and insurance costs. Most lenders do not want this amount to be more than 28 percent of your gross income. Some lenders, however, will still approve a loan where this figure is as high as 40 percent.
The back-end ratio is the percentage of your gross income that is needed to cover all of your debts. These include the anticipated mortgage loan debt as well as car loans, credit card payments, other loans and child support payments. Most lenders do not want this figure to be more than 36 percent, but some lenders will go as high as 45 percent. Some programs, such as the Federal Housing Authority and the Veterans Administration, also allow this percentage to be higher than 36 percent.
Your down payment percentage refers to the percent of the total cost of the home that you are able to make as a down payment. A down payment of at least 20 percent is preferred, but many lenders will allow you to make a purchase with a significantly lower down payment. In general, having a larger down payment will help reduce your mortgage loan costs and your interest rates.
Looking at Your Personal Situation
Just because you can get a mortgage loan, it does not mean that you should get one. In addition, qualifying for a loan does not mean you are truly prepared for the financial responsibility of owning a home. Therefore, you need to consider your personal situation when deciding how much home can you afford and whether now is the right time for you to buy.
Is this an ideal time to buy? Have you researched the local market stats? If you have a steady job, if you do not anticipate moving away in the next five years, if you do not have any anticipated major expenses in the near future and if your front-end and back-end ratios are below the top limit, you are probably in a great position to make a home purchase.