Determining how much of a home you can afford and what will be easiest on your budget is important before you start looking at properties. How much you can afford will vary based on a number of factors such as your income, your credit score and the kinds of loans for which you qualify.
To start with, you should look at a few pieces of data, such as your:
- Monthly debts
- Available savings
- Household income
- Credit score
For example, if you bring home $2,000 per month and have $500 in debts to pay, you’ll have $1,500 leftover. Not all of this should go towards the home. Instead, it’s important to only spend around 25 to 28% of your income on your mortgage, so there is leeway to protect your investment.
One great rule to follow is to be sure you have at least three months of payments (including debts and your mortgage) saved so that you have protection in the case of an emergency.
Understanding the debt-to-income ratio
Your debt-to-income ratio also matters. This is the ratio used to determine your total monthly debts compared to your pre-tax income. Depending on how good your credit score is, you may be able to qualify with a higher ratio. Most people qualify with a debt-to-income ratio of 28% or less because your housing expenses shouldn’t be more than 28% of your overall income. An example is if you have a mortgage of $630 and a monthly income of $2,250. Dividing $630 by $2,250 gives you 28%.
Buying the right home matters. Understand your rights and responsibilities, so you can make a good financial choice.