A home is, for most of us, the biggest expenditure we will ever make. How do you figure out how much home you can afford?
New websites for homebuyers make it easy to make these calculations, once you know the key numbers to plug in. The biggest number is your gross annual income. Once you have that figured out, you will need to figure your monthly debt. Be sure to include all forms of debt like credit cards, car payments, school loans, etc. The third number you will need is the amount you can make on a down payment. If you have these three numbers, you can just plug them into a calculator, like this one from Zillow. There are quite a few such calculators available on the web. For a slightly more complex formula that includes your credit score and the zip code you’re interested in, go to Nerd Wallet.
Debt To Income Ratio
The main thing that you want to find out from these calculators is your DTI, or debt to income ratio. If you used Zillow’s calculator to figure out how much you can afford to spend on a home, you can then go to their DTI calculator and figure your overall debt to income ratio. A good DTI is considered to be 36% or lower. According to the 36% Rule, you should never let your DTI exceed 36%. In order to be considered for a Qualified Mortgage, 43% is the highest DTI that you can have. It’s important to have a Qualified Mortgage because they have better protections for borrowers, such as a limit on fees.
Another nifty tool you can play with on the Zillow site, Nerd Wallet, or other sites is a mortgage calculator. This tool can show you different interest rates for different time periods, like a 15 year mortgage versus a 30 year mortgage. Playing around with different numbers will give you a sense of how you would need to budget and what the overall cost would be for different mortgages.
Once you have a sense of how much you can spend on a home, then you will need to consider what the housing market is like in the area you want to buy. More on that to come . . .
Sources: https://www.zillow.com/home-buying-guide/can-i-afford-a-house/, https://smartasset.com/credit-cards/what-is-a-good-debt-to-income-ratio