“How much home can I afford”? This question is asked by almost all buyers, not just first time home buyers. With changing interest rates, homeowner association fees, assessments and rising home prices, it’s natural to wonder what you can actually spend on a new home.
The best way to answer this question definitively is to speak with your lender. They will ask you questions about your income, your assets, your down payment, local property taxes, home owner insurance, credit ratings and additional debt. Your loan officer will also talk with you regarding your down payment and current interest rates.
Interest rates affect affordability more than most other considerations. As the cost to borrow money rises, the amount of loan available lessens and this means the buyer can qualify and afford less of a home. While loan programs vary, there are basic guidelines which most lenders follow.
Most conventional loan programs look at two things: the proposed mortgage amount and your total monthly debt obligations. The mortgage payment includes principal, interest, taxes and insurance and lenders expect this payment to be no more than 35% of your monthly gross income. The total debt each month should be no more than 45%. Total debt includes your mortgage payment plus monthly recurring debt such as credit card debt, car payments, student loans, etc. – anything that might be considered long-term payments.
Combined, these items go into determining how much you can borrow and thus how much you can afford. The first step to understanding your specific situation is to find a lender you can trust and talk with them about your needs.