Buying a home is often one of the biggest financial decisions in your life. It can also be nerve-racking, and you may have a lot of questions. Determining how much to spend on a home will most likely be at the top of your to-do list before you begin your search for a home.
1. Calculate Your Debt-to-Income Ratio
The first step is adding up your total household income. Next, make a list of your existing monthly debt obligations, including car payment, credit card payments, student loan payments and any other debt you currently have. A good rule of thumb is to spend up to 40% of your gross monthly income (income before taxes are taken out) on your mortgage. Depending on the loan product, the total debt-to-income ratio may vary, so make sure to check with your lender.
2. Evaluate Your Down Payment
There are several different types of loans that can affect the amount you can afford. Certain loan products such as FHA or VA loans can allow you to put a relatively small amount of money down. On the other hand, conventional loans may require a higher down payment.
3. Talk to Your Lender About Other Costs Associated with Your Loan
Other factors such as mortgage insurance, lender fees and interest rates will come into play with each type of loan. Talk to your lender about the fees associated with your loan, including estimated closing costs. Don’t forget about HOA dues or homeowners insurance, as these can also affect a home’s affordability.
There are a few ways to maximize your home budget. Start by thinking about your current income, the amount of debt you have, and the amount of money you have available for a down payment.