How Much Home Can I Afford? Carmel Homes

So you’ve determined that homeownership is right for you. Now what? Before you begin your home search, determine how much home you can afford. Knowing what price range you can afford can help narrow down your potential home choices. Here are the factors that determine how much home you can afford:

Yearly Income—FHA considers 31% an acceptable risk for the debt-to-income ratio (DTI).  The DTI includes the principal and interest, escrow deposit for taxes and insurance, mortgage insurance premium, homeowner’s association dues, ground rent or special assessments, and secondary financing payments.  The total fixed payment ratio of 43% is considered acceptable for FHA standards.  The total fixed payment includes the PITI and all other recurring monthly debts.  Include in your yearly income any tips, commissions or alternate sources of income.

Other or Recurring Monthly Debts—subtract from your yearly income any other monthly payment obligations like car payments, school loans, credit cards, etc.

Current Interest Rate—the current interest rate impacts how much in monthly mortgage payments you can afford. A lower interest rate generally means a lower monthly mortgage payment.

Property Taxes and Home Insurance—often times the property taxes and home insurance get rolled into the monthly mortgage payment. Both property taxes and home insurance amounts will vary depending on the location, size of home and other factors.

Down payment—the amount you put down can also help lower your monthly payments. Some home loans still exist that allow you to put less than 20 percent down, but Private Mortgage Insurance (PMI) is added to the monthly mortgage payments.

Now that you know the factors involved, determine your price range:

Use an online mortgage calculator—if you want to get a rough idea of how much home you can afford, use an online mortgage calculator. By inputting your information, the calculator then gives you an idea of what price range you can afford. The Ginnie Mae website includes a basic mortgage calculator where you input your income and any other monthly debts like car payments or school loans and receive an estimation of how much you can afford in mortgage payments.

Talk to a mortgage broker or lender—online calculators give you a good estimate, but the best way to determine how much home you can afford is to get pre-approved or pre-qualified by a mortgage broker or lender. The broker or lender will use the same formulas as the online calculators, but will also take into account factors like the current mortgage rate, property taxes and home insurance, including PMI to determine a price range.

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