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How much you can afford


Factors that Determine How Much House You can Afford

If you are thinking of buying a home of your own then the first question that comes to your mind is how much house can I afford. In fact, it is a very reasonable question because before buying something you should know not only what you want but also what you can get. So, before you contact any real estate agent or start visiting open houses and model homes, you should know for sure how much house you can afford.

Once you get the answer of the question ‘how much house can I afford’, you can start your home search with a proper budget and thus you can save your precious time by not visiting the homes that are out of your reach. In order to know how much mortgage payment you can manage to make every month and how much house you can afford you need to be aware of the following factors:

  • The factor that mainly determines your home affordability is the debt-to-income ratio. According to lenders, your debt-to-income ratio reflects how much mortgage debt you can manage to handle. So, what amount of mortgage loan will be approved for you depend on your debt-to-income ratio. The debt-to-income ratio actually expresses how much of your income is being used for making the debt payments. Here, at the time of calculating the debt payments, all of your debts like existing mortgage loan, car loan, student loan, credit card debt are taken into account.
  • Generally all the banks and the other mortgage lenders consider a debt-to-income ratio of 36% as the upper limit. This means that a debt-to-income ratio above 36% is seen as risky. So, if you hold a debt-to-income ratio higher than 36% then your mortgage loan application may get disapproved. Even if you manage to get the loan, you will have to pay substantially high interest rate on your mortgage.
  • There are some lenders who will not deny giving you a home loan even if your debt-to-income ratio is as high as 45%. But, you should be ready to pay high rate of interest. There are some special mortgage programs like Federal Housing Authority Mortgage Programs and Veterans Administration Mortgage Programs, under which you can get a home mortgage loan even with a debt-to-income ratio of higher than 36%.
  • If before applying for a home loan, you pay off as much debt as possible, then your debt-to-income ratio will surely come down. This will help you to get a high amount home loan at a low interest rate.

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