Buying a house is very different from pulling up to a store to buy a shirt because it has important steps and processes that are crucial. Purchasing a house is much more complex. Although the experience can be simple if the steps and processes are properly considered and done. There are also multiple options and choices that you will encounter so being aware, preparing, and doing research can help you make an informed decision. Purchasing a home is all about wise decision making! You need to be extra careful and cautious about everything because this might be the biggest purchase you’ll ever make in your life and you want it to be something you will not regret.
Almost every time, the financial factor is the first thing to settle and figure out in home buying. Buying a house is not cheap but it is an investment so you want every cent that you put into it to matter. You also don’t want to spend money that you don’t have. That means not getting a house that isn’t really within your means. So finding out the range of your budget will help you a great deal. So how do you do this?
First thing to know is that there are factors that affect how much you can afford. Some of the important factors are your income, the debts you have, interest rates/mortgage rates, your credit history, and your credit score.
Assessing what you can afford can help you give an idea. Of course the outcome of your self assessment may change depending on the lender or bank you choose in the future to work with but at least you have some idea.
In this article, we’ll present some of the most used calculations by lenders. This can be a great start but this only scratches the surface of everything but fear not there
1. Calculate by multiplying your annual income by 2.5 or 3
To do this, take your gross income and then just simply multiply it by 2.5 or 3. The outcome is the maximum value of the home that you can afford. So for example if you make $150,000 a year then the house you should purchase should be between $375,000 to $450,000.
2. Divide your monthly income by 28%
This is also called the front-end ratio. This deals with your housing expenses and income ratio. Basically do this by taking note or by listing down the housing expenses for the home that you are eyeing on and then divide the total to the total of your monthly income. If you end up having a 28% ratio or less, the chances of getting your mortgage approved is high. So for example, if you’re earning $12,500 a month, your monthly expenses should not be more than $3,500.
3. The 36% rule
This is also called the back end ratio and this deals with your debt-to-income ratio. This is calculated by taking the total of your monthly minimum debt payments and then dividing it by your gross income. So if you have a monthly income of $12,500, your debt should not be higher than $4,500.
Another thing that you should take into consideration when looking at the financial aspect of buying a home, is how much do you really need. It doesn’t mean you were given a huge loan amount that you will find the most expensive house that is within that loan amount. This part is subjective but it is worth noting. If you live alone then do you really need a 5 bedroom house? It is not wise to go above and beyond if it’s not needed. Do think about this also because most of the time if you qualify banks will try to give you as much as they possibly can, because it profits them so be wise. Does not mean that the means are available that you would take more than you need.