What price-point for a home can you afford?
The number of factors that contribute to a home purchase can seem daunting however, they can be simplified. It is important for you to fully understand what type of mortgage payments fall within your budget.
Debt-To-Income Ratio
The first priority you need to look at will be the amount of your monthly mortgage payment. If you have a lot of debt, lenders may consider you a risky credit venture. This makes your debt-to-income ratio a primary factor in determining your loan amount.
Lenders will determine how much of a home you can afford by looking at loans you paid off within the past year. They will often give discounts on the mortgage if you have loans paid off in the last year. The current paradigm for payments is approximately 25-30 percent of your monthly take home pay. Personally, I would buy a house, which falls in the 20-25 percent of my monthly take home pay.
Terms of the Loan
Typically, there are two main mortgage loan terms: 15-Year & 30-Year loan terms. In the end, you will pay more interest on a 30-year loan; however, you can afford a more expensive house in comparison to 15-year loans.
The Complexity of Interest Rates
Interest rates are more than just a number. I hope that these numbers are in the single digits, which is in-line with current market rates. The interest rates are directly tied to the borrower’s monthly payment, which, in turn, is determined by how much the borrower brings in for income. Lower interest rates equates to affording a larger principal loan amount, which translates to a more expensive home.
The History of your Personal Credit
Past credit history, not just score will play a major role in determining your interest rate, which will directly affect your loan amount. For example, a six percent mortgage will cost much less per month than an eight percent mortgage. It may not seem like much now but, when factored in over time, the amount of money saved could be a very large amount.
The Amount of your Down Payment
The amount of the down payment is a strong factor for lenders when determining your loan amount. The higher the down payment the more serious you look to a lender. For example if you were to qualify for a home loan of $300,000, but your dream home was currently listed at $350,000 a down payment in the amount of $70,000 would get you that home.
This scenario is just one example; however, it does show how a down payment can affect the purchase of a home you can afford. There are lenders out there who may only require a five percent down payment; however, you are free to pay more than that which will reduce your monthly payment. A larger down payment will also reduce the amount of interest paid over time by reducing the principal loan amount.