How Much Can I Afford For A Home-Personal Finance Post

How much can I afford for a home is a very relevant question.

With these economic times, this must be the first question. This question is a good question to ponder, and one that every individual should ask before beginning the new home search. How Much Can I Afford For A Home- depends upon many factors in your personal financial status.

Long story short the answer to the above question is, what is your monthly income versus your monthly debt?

However, you cannot forget all of the other essentials you must have each month while figuring out your payment for a home. This includes all household expenses and miscellaneous expenses. Electrical expenses, water, sewage, phone, cable, life insurance premiums, child care (if applicable), groceries, insurance premium co-pays, clothing, car insurance, etc.

When you take all of this into consideration, you will be assured that you can afford a house. This includes the principal, interest, taxes, insurance premium, and any other applicable fees, such as a condo fee. *see below how the debt to income is evaluated within mortgage lending.

This will give you a true answer to your question of “how much can I afford for a home?”

So, How Do You Figure All of This?

The answer to the housing payment is intertwined with your debt-to-income ratio and I will show you how to do that. Only you know how much you spend on the other necessary expenses such as groceries, clothing, fuel, utilities, TV, phone, etc. When you add all of this in, can you make your payment without any hesitation?

We will take you through some of the processes so that you can decide. This should help you to see if you are ready to take on the obligation that will last for 30, 25, 20, 15, or 10 years. Whatever the term is that you choose. The lower the term of the mortgage, the higher the payment will be.

To be quite honest there isn’t a simple answer for one size fits all. It has to be narrowed down to your individual circumstances. The reason for this is that each mortgage applicant has a different lifestyle. They work in different careers, have different saving abilities, and their credit may be excellent, great, good, or fair.

When you start to look at buying a home you are definitely asking the right question when you start with how much the house can I afford. I am going to give it to you from this underwriter’s point of understanding of the guidelines and what will work best for most who have disciplined themselves to start the process.

First Analysis and The First Item You Should Check

Basically The House You Can Afford Is Determined by:

How much money you *and your co-borrower make
The debts you have, installment loans, revolving/credit cards, government such as taxes payments, child support, and alimony (if applicable, and any debt listed on the credit report that is greater than 10 months. *Also mentioned below…
What are your assets and how much cash do you have to pay for the down payment

If you know that your credit, employment, and assets are acceptable, then the way to determine how much house you can afford goes like this:

What is your monthly income?
You can use your gross monthly income figure before taxes. *Please note that Dave Ramsay indicates that you use your net income after taxes. Well, that is a safe approach, however, that is not how mortgage banks/companies figure out your ability to afford a home. The GSEs, Fannie Mae/Freddie Mac allow mortgage lenders to use the borrower/co-borrower (if applicable) gross income before taxes to calculate housing expenses and the total debt to income. However, as stated, using net income would take into consideration the miscellaneous expenses that a person has to pay such as the water bill, cable, electricity, phone, groceries, and other essentials. These items are NOT included in the DTI ratio.
For bonus income and all variable income, you will need a 24-month history as a general rule or manual underwriting. However, if you have excellent credit, normally a lender will pre-underwrite your loan in the automated underwriting system. (Desktop Underwriter (FNMA), Loan Prospector (Freddie Mac). This means that DU/LP may allow 12, plus months as long as it is consistent and will continue. This depends upon your overall file.
All income streams that you need to qualify for will need to be calculated and verified for consistency as indicated above. This includes but is not limited to: bonus, commission, 2106 expenses, self-employment, tip income, etc…
If you can qualify with your base salary/income it is recommended. The other income may be used for compensating factors if needed.
Normally self-employment needs a 24-month history. However, if the prior job was associated with the current job, the time frame may be less when the other criterion in the files is satisfactory.

Here Are Examples of How Your Income is Calculated in Mortgage Lending …to answer your question of How Much Can I Afford For A Home?

*This is where you can see how your income is calculated in mortgage lending.

That will help give you some idea if your income is sufficient for the prospective loan amount.

Housing Expense For a New Home Loan

Mortgage Loan Payment PITI = Principal, Interest, Taxes, and Insurance – PMI (mortgage insurance) if the loan to value is greater than 80%) is also included.

The principal and interest payment (calculate here)

Estimate property taxes and insurance here

Mortgage Insurance Calculation (PMI) –calculate here

What Are Your Current Debt-Credit Obligations Compared to Your Income

All of your installment credit obligations greater than 10 months are counted in your debt-to-income ratios
All revolving debts are counted
Student loans must be counted * any debt without a payment amount on the credit report use 5% for that payment amount
Child Support/Alimony is applicable
Any agreed-upon tax payments to the government
Open-end loans are not usually counted
*and any other long-term obligation

Once you have completed the above assessment of your total housing expense, plus your total other credit obligations, you will then divide that amount by your gross monthly income. That is the debt-to-income factor for a mortgage loan. This should be anywhere from 36% to 45%. *at this current posting. If the GSE’s underwriting systems (Desktop Underwriter- Fannie Mae/Loan Prospector-Freddie Mac) are used to calculate DTI and eligibility, and if all standards of the loan are good, assets, savings, credit scores, reserves…the DTI may be up to 50%. * This will not normally happen with manual underwriting from the lender.

Debts that are not included in the DTI

Any borrower debts on the credit report that has less than 10 months remaining, do not have to be in the DTI unless there are delinquencies. It will depend upon the lender’s own guidelines as well.
Debt that is paid by another person who is not on loan. However, there must be documentation in the file that the other individual has paid the payments for the past 12 months and in a timely manner.
Business debts on the borrower’s credit report that has a proven history that the company is paying the debt (from company funds). There must be verified information in the file for proof the company pays the debt and is not delinquent.
If Alimony payments will end within 10 months, they do not need to be in the ratio.
Any debt paid at closing does not have to be in the DTI ratio.

Debts are required to be paid at closing

Any delinquent debt that could affect the first lien position of the lender must be paid at closing. i.e., tax liens, charge-offs, collections, child support late payments, judgments, etc.
Funds sufficient to pay off any debt that is required at the closing of the loan must be included in the required funds for closing.

Relevant Information To Considering How Much You Can Afford For A Home

Some individuals follow their heart instead of their affordability. It is easy to do, and we all want the most for our money. However, not all of us can afford the same home.

Important facts to consider:

You probably do not want to be in a financial status where you cannot go out to dinner once in a while.
Making a housing payment (possibly) over and above what you are paying for rent/or the present house does not put a strain on livability.
Will buying a home deplete your savings/assets?
With this transaction will you still be able to save any money?
Will you have any other major purchases after the purchase that could put you under a strain? Car loan, etc.?
Are you purchasing a home that is in good repair? If you get a home inspection-there can still be things that break or stop working.
Had you rather live in a neighborhood that has medium-priced housing and live comfortably, or buy a home where more expensive homes are and be on a very tight budget?
Think about payment overload, think about those things that are unforeseeable so that you do not go way over what your budget is.

Advice From a Previous Mortgage Underwriter

Be realistic and have your expectations in order. Getting a larger house is not always the best choice; it should be more about the quality of the home and not square footage.
Do not judge your financial status according to your best friends.
Remember that you can always upgrade the size of your home by renovation or a new purchase when your financial status changes.
Keep saving money, and invest if you can. Do not get yourself into a debt situation where you have no funds left over after paying your mortgage, debts, and normal household expenses. You still have to pay the electricity, phone company, gas company, cable (maybe), car insurance, buy groceries, and have child care. *Child Care payments are counted in DTI for VA loans
You can pay more $$$ on the principal of your loan and have more equity if you need to sell. This saves interest over the life of the loan.

*as always- this is a summary of what is relevant to this writing. Guidelines, rules, and regulations change frequently. This post has been updated as of 09-27-2022

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