How Much Home Can I Afford?
“How Much Home Can I Afford” is a typical question one asks themselves when thinking about buying a home. It’s a very good question and a good place to start. This question usually pairs with the question of “How Much Will A Bank or Lender Give Me To Buy A Home?”.
Typically people will find out how much a bank or lender will give them to buy a home to figure out their Max Purchase price and then they will fine tune that with asking how much can I really afford to pay each month. It is really takes self discovery to determine what kind of lifestyle one wants. Do I want to be tied down to my house with huge mortgage payments each month or do I want smaller mortgage payments so I can have plenty of money for recreation?
So a good place to start is getting an idea of what banks and lenders will give people for a loan. The primary formula or Ratio in determining How Much Home Can I Afford based on bank or lender standards is the Debt To Income ratio (DTI). You need to find out what DTI ratio you qualify for.
DTI can vary typically from 45% to 55%. DTI can best be illustrated below and then we’ll pick up the discussion again. Our scenario will have a person that makes $80k gross salary per year, qualifies at the top end of a 55% DTI, and has a total of $2000 a month in minimum credit card and car payments.
Income of $80k per year / 12 months = $6666
$6666 x .55 DTI = $3666 DTI (Debt To Income ratio) – This is the maximum debt or outgoing payments ($3666) per month based on an $80k annual income that a person could have to not go over the 55% DTI.
$3666 – $2000 debt payments = $1666 max monthly home payments
So in today’s market with rates around 4% a monthly home payment of $1666 could get you a home of about $250,000.
A 55% DTI is the Highest you will find anywhere. For many banks and lenders to be able to go as high as a 55% DTI you would primarily need two things.
- 700+ credit score
- 3 months reserves of the monthly payment. So if you got a home with a monthly payment of $1666, then you would need about $5000 in reserves in the bank.
We hope this simple explanation helps. For more information please call us at 719-422-9474.