If you’re interested in buying a home, one of the first things you’ve probably thought about is how much house you can truly afford. To determine how much you can afford, you’ll need to look carefully at your current finances and responsibilities and consider how they may change over the next few decades. You’ll also need to look closely at the full spectrum of expenses involved with being a homeowner in addition to your mortgage payment. A mortgage professional like those at BostonMoneyMan in San Diego, CA, can help you in this process, and we offer no-obligation quotes. We’ll help you figure out how much mortgage you can afford and give you the best-possible advice to start your journey toward homeownership.
Examining Your Finances
There are a few essential elements to consider when it comes to your financial health and what available funds you have to dedicate to a monthly mortgage payment and other homeowner’s expenses. These include:
- Income from your employment and any other sources
- A full list of debts like loans, credit card payments and other obligations
- Other monthly payments for things like insurance payments, cell service, gym memberships, and more
- Monthly contributions to savings accounts, charities, and other commitments not related to bills
- A list of any regular monthly expendable uses of funds used for going out to eat, going to the movies, and other activities
Determining How Much You Can Afford
One important metric that relates to your monthly expenses is your debt-to-income ratio (DTI). We’ll look at your current DTI and determine what your it will be after taking on a new mortgage payment. It’s a good rule of thumb that you should not exceed 43% DTI, but the lower is always better.
In addition to your DTI, one rule of thumb when you are determining how much mortgage you can afford is that your monthly mortgage payment should not exceed 28% of your gross monthly income (before taxes). Your monthly housing payments (which includes mortgage, homeowner’s insurance, property taxes, and private mortgage insurance) should not exceed 32% of your gross monthly income. Remember, every case is different, and these rules are general guidelines rather than regulated rules.
Down Payment and Other Up-Front Costs
While you’re calculating how much mortgage you can afford, you will need to consider how much down payment will be required and the cost of closing expenses. Your down payment should not fully deplete your savings. If your down payment is less than 20%, you should also keep in mind that you will need to pay for private mortgage insurance (PMI) each month until you reach 20% equity. Some nonconventional loans, like FHA loans, require that you pay mortgage insurance for the life of the loan.
We hope that you’ve learned a little more about how to evaluate your finances and determine how much mortgage you can afford as you begin your journey to buying a home. Contact BostonMoneyMan in San Diego, CA, whenever you’re ready to take the next steps!