Before you get swept away by a kitchen backsplash or potential housewarming party, you need to figure out how much home you can truly afford. Do some research. Here is our home affordability calculator and create an estimated budget so you don’t own a house for eating instant ramen in a big unfurnished house. We’re here to help you crunch the numbers. Our home affordability calculator is simple to you. We look at the same sort of financial factors that lenders look at when they determine how much they’re willing to lend you.
You can use this information to help prepare your finances ahead of time, but your best foot forward when you apply for a mortgage. The first thing our calculator will look at is your credit score. Your credit score is essential for mortgage lenders as a rule. The higher your credit score, the lower the rate you’ll pay on your mortgage. But there are many factors that go into your rate beyond just your credit score. Your credit score will also be a factor in determining how much you can borrow and what type of mortgages will be made available to you.
A higher credit score will generally lead to lower rates and a bigger selection of mortgage products. The next thing we’ll look at is your gross annual income before taxes. Lenders will compare your income with your existing debts and the price of the house you want to buy. To determine how much you can afford next, a lender will consider your assets, assets or your savings, investments, anything you might use to cover your down payment and closing costs.
They want to see that your savings are consistent.
And you didn’t just deposit a large amount right before applying for a mortgage. Conventional wisdom says you should aim to put down at least 20 percent of the value of your home.
But there are many loan programs available that allow for a lower down payment. As a rule, a larger down payment typically means a lower interest rate with more stake in the property. Lenders see your loan as less of a risk. So they may give you a lower rate. If you choose a lower downpayment, your rate may increase somewhat, but you may find a higher rate is worth it to get into your home faster, according to the Consumer Financial Protection Bureau.
If you choose not to put 20 percent down for a loan, mortgage insurance may be required on your loan. You choose a standard conventional loan with less than 20 percent down. Private mortgage insurance or PMI may be required.
PMI is a monthly premium added to your mortgage payment to protect the lender in case you start making payments on your loan amount typically ranges from point five to one percent of the loan amount. If you want to make a down payment of less than 20 percent but avoid private mortgage insurance, you can consider other types of loans such as FHA or V.A. loans or perhaps a second piggyback mortgage. Each loan type comes with its own pros and cons. So be sure to talk to a licensed lender before making your final decision.
Our home affordability calculator also looks at how much you currently pay towards monthly debts, including those that aren’t housing related. In order to help estimate your debt to income ratio or DTI, mortgage lenders will look at your DTI to determine whether you can afford a home and how much home you can afford. When you plug a realistic estimate of your DTI into our calculator, it helps us more accurately estimate how much home you can afford. Here’s how lenders calculate your DTI.
Divide all of your monthly recurring payments by your monthly pre-tax income. Mortgage Loans study suggests that borrowers with a higher debt to income ratio are more likely to run into trouble making monthly payments, according to the Consumer Financial Protection Bureau.
Lenders will calculate your DTI and make sure it doesn’t exceed a certain threshold before offering you a mortgage. A DTI of 43 percent is the general limit for many mortgage programs available today. So a good rule of thumb is ensure your DTI is under this limit. That said, your DTI is slightly higher. There are other programs available that may still work.
When calculating your DTI, you want to keep in mind that as a homeowner, your monthly costs include much more than just your mortgage payment, property taxes, HUAC fees, homeowners insurance, utilities, private mortgage insurance, repairs and maintenance are all additional monthly costs that you could be responsible for.
To give it simple, here’s what you need to know to estimate how much house you can afford using our home affordability calculator, your gross monthly income and estimate of what you want your down payment to be. To figure this out, take stock of your liquid assets to figure out where you stand for a downpayment and closing costs. Check your credit score to estimate the quality of your credit. Calculate your DTI to see if you’re under or close to 43 percent when you’re ready.
Talk to a licensed lender to get the most accurate picture of what you can afford. If you have a real estate agent, speak with them as well for recommendations. We used our agent, a senior real estate specialist in Toronto, Ontario, to help us find a lender.. Start budgeting and save up so that you’re ready when the time comes to purchase the home of your dreams.