Question: What can I afford?
Answer:
Know what you can afford is the first rule of home buying,
and that depends on how much income and how much debt you
have. In general, lenders don't want borrowers to spend
more than 28 percent of their gross income per month on
a mortgage payment or more than 36 percent on debts.
It pays to check with several lenders before you start searching
for a home. Most will be happy to roughly calculate what
you can afford and prequalify you for a loan.
The price you can afford to pay for a home will depend on
six factors:
1. gross income
2. the amount of cash you have available for the down payment,
closing costs and cash reserves required by the lender
3. your outstanding debts
4. your credit history
5. the type of mortgage you select
6. current interest rates
Another number lenders use to evaluate how much you can afford
is the housing expense-to-income ratio. It is determined
by calculating your projected monthly housing expense, which
consists of the principal and interest payment on your new
home loan, property taxes and hazard insurance (or PITI as
it is known). If you have to pay monthly homeowners association
dues and/or private mortgage insurance, this also will be
added to your PITI.
This ratio should fall between 28 to 33 percent, although
some lenders will go higher under certain circumstances.
Your total debt-to-income ratio should be in the 34 to 38
percent range.
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