How much house can you afford?

If purchasing a home is in your future, you’ll want to take a good, hard look at just how much home you can really afford.

That “magic number” is primarily the function of two key items: The amount you are able to borrow, and the amount of payment you are able to afford.

Know your credit. Unless you can buy a home outright with cash, you’ll need to know the state of your credit before you even start to consider purchasing a home. If your credit is on shaky ground, you may not qualify for a home loan or may be charged a higher interest rate.

Save for a down payment and closing costs.  Mortgage lending standards are stricter than in years past, so you’ll want to allot extra time to save for a down payment if you haven’t already done so. Mortgage insurance requirements are minimized with a down payment of at least 20 percent but, occasionally, lenders will approve the purchase of a home with down payments as low as 3.5%. Don’t get discouraged; saving takes time.

Assess your income, debts. Get a good handle on exactly what’s coming in (and what’s going out), of your household budget on a monthly basis, as lenders will be looking at this during the preapproval process. In addition to income, assets and down payment, we also look at liabilities and obligations — ranging from auto loans, credit card debt, child support, etc.

Generally, your house payment should not exceed 28 percent of your gross monthly income. While lenders have flexibility in setting up guidelines in determination of the eligibility, the industry “rule of thumb” is your total monthly payment (including insurance and taxes) should be around 28 percent of your gross income.   Our experienced mortgage loan originators will be glad to review your situation to determine your eligibility!

Be realistic about what you can pay back. Often, borrowers may be “preapproved” for much more than they can reasonably afford, based off of their earnings, outstanding debts and the terms of the loan. While that preapproval figure may look tempting, you may be over-extending yourself. Be honest about how much home you can comfortably afford. You’ll also want to allot a little bit of wiggle room in case “the worst happens”; job loss, unexpected illness, new members of the family and other big life changes that can impact your ability to meet your financial requirements and spell disaster if you have no cushion.

For most people, buying a home is the single largest personal obligation they’ll ever take on. Don’t get too caught up in the excitement of the moment, and remain realistic about what’s best for you and your family over the long run. Do the math, and be an educated consumer to assure you are buying a home that will positively enhance — not compromise — your future.