how much house can I afford

5 Factors to Determine How Much House Can I Afford

How much house can I afford? That is the million dollar question.

Before checking out that dream home, you need to answer one question — how much house can I afford?

First Things First

Is this the right time to purchase a new house?

While there’s no easy way to answer this question, you can start by weighing your choices. Start by asking yourself these important questions:

  • Are you are willing to take the consequences of owning your new home? This means paying property taxes, maintenance repairs, and insurance, among other expenses.
  • Is it cheaper to buy a home than to rent?
  • Is your income enough to pay monthly loan payments?
  • Can you afford the home you’re eyeing?

These are just some of the most important questions you need to answer before you decide.

If you get stuck on the last question and you’re asking yourself “How much house can I afford?” you probably need to do some number crunching.

Before you start to get reeled into the next steps involved, it’s also useful to make a realistic budget for buying a house.

Once you have a budget estimate, you can determine how much you can afford to spend on a new home.

Factors To Determine How Much House Can I Afford

Before getting invested in the home search, it’s crucial to determine your budget. This keeps you grounded and you can make sure that you won’t bite off more than you can chew.

1. Savings

Do you have money set aside for making a down payment? When you buy a home, you need to put down 20% of the purchase price of the house that you have been eyeing. But don’t let this discourage you, the actual down payment required varies by lender.

If you’re eligible, you can buy a home with zero down payment. You may also qualify for first time home buyer grants and programs that may help you pay for the down payment and closing costs. However, it’s always better to have enough funds to cover the expenses related to buying a home.

2. Your FICO Score

Know your FICO or credit score and find out what you can do to improve or maintain it.  A high FICO score gives you the advantage to choose from the best loan options. Whether you buy a house or not, it’s useful to know your credit score in case you need to borrow money.

Your FICO Score Is In Your Hands

The FICO score is the credit score that is commonly used by US lenders. The score considers information about:

  1. 35% – Your credit history (how good are you in paying your debts i.e. credit cards)
  2. 30% – The amounts that you owed (how much money you borrowed)
  3. 15% – Length of credit history (how far back is your credit record)
  4. 10% – Types of credit that you used (credit cards, housing loan, car loan, other loans)
  5. 10% – New credit (any additional loans apart from current ones)

Lenders use this scorecard to know if you are eligible for a loan. This also predicts the chances that you’ll pay your bills on time. From the lending scorecard, lenders may determine the credit terms as well as the interest rate of the loan.

However, the FICO score is not the only basis for lenders. They also consider other factors such as your annual income, history of employment, home value, car value, and other financial relationships you have with them – if you are borrowing from a bank they may consider the movement of your checking or savings account.

Credit Score Ranges

FICO scores range from 300 to 850 and are categorized as follows:

    • 800-850 (Exceptional)
    • 740-799 (Very good)
    • 670-739 (Good)
    • 580-699 (Fair)
    • 300-579 (Poor / Bad)

About 18% of all consumers have credit scores which are considered fair. Meanwhile, about 66% have credit scores of at least 670.

Your FICO score depends on your credit habits. It is always good to be aware of your credit score to help you answer the question – how much house can I afford?

If possible, try to make your credit score higher by doing the following:

  1. Pay revolving credits and other bills on time.
  2. Try to keep your credit balances at a minimum.
  3. Do not close credit cards since a long history of good credit is better than no credit history at all.
  4. Limit new credit applications.
  5. Track your credit report.

Importance Of A High FICO Score

Why does the FICO score matter anyway? The FICO score matters because it makes the lending process faster. These scores allow lenders to follow standardized credit evaluations and all borrowers generally receive fair treatment.

People with very poor credit scores generally qualify for lower loan amounts and would have higher interest rates. Meanwhile, borrowers with higher credit scores have more choices and they can also take advantage of competitive rates.

Hence, your credit score would have a large effect on how much you can afford to spend on a home.

3. Your Income

The affordability of home prices is relative to a person’s income. You know how much you make, so basically you have an idea of the price range you can handle. It is important to stay within a reasonable budget.

As a rule, your total debts should not exceed 36% of your pre-tax income. Consider the monthly mortgage payments you make for a new property as part of the 36% and don’t forget to include property taxes.

When you apply for a mortgage, lenders use this ratio to see if you earn enough money to pay back your loan while paying for your living and recreational expenses. You can avoid getting caught off guard by skyrocketing expenses by forecasting additional expenses related to homeownership.

By taking these expenses into account right from the start, you would have a better answer for that pressing question – how much house can I afford?

Based On My Income, How Much House Can I Afford?

Now we go into specifics so that you would know how much of your monthly income must go to your mortgage payments.

Again, we have to stress that buying a home over your budget may overstretch your budget. You may have some difficulty in making payments on time and you want to avoid being in this situation as much as possible.

Some follow a basic formula saying the starting price point in shopping for homes must be with a purchase price that is equivalent to 2.5 times your salary.

So let’s say your annual salary is 100k. So how much house can I afford with 100k salary?

If we follow the basic formula, $100,000 x 2.5 = $250,000 then you can afford to buy a house worth 250k, which is a conservative estimate.

For people living in cities where the median price of homes is higher, this budget may not be enough to buy a house. So, some financial experts suggest though that you can afford to pay a mortgage which is as high as 28% of your gross income. That means that if your annual salary is 100k,  you can afford to make annual mortgage payments of $28K (28% of $100K). This translates to monthly payments of $2,300 ($28K divided by 12 months).

So, how much house can you afford with a 100k salary?

Your $2,300/month payment can also translate to a purchase price of $450,000 if we assume a 4.5% fixed rate for 30 years.

4. Type Of Loan

When it comes to a home mortgage, it is also important to know about the different types of loans available and how much house payment can I afford.

FHA Loan VA Loan Fannie Mae/Freddie Mac Loan
  • Insured by the Federal Housing Administration (FHA)
  • Guaranteed by the Veterans Administration (VA)
  • Not guaranteed or insured by the Federal Government
  • Since it is insured, you can get good terms like a low downpayment of 3.5% of the purchase price
  • Guaranteed with no money down but usually has a one-time charge (funding fee) of 1.25% – 3.3% of the loan amount.
  • Lowest downpayment for a conventional mortgage loan can be 3% – 5%
  • You need to pay a mortgage insurance premium (MIP) when you get an FHA loan.
  • There is no required mortgage insurance.
  • If less than 20% down payment is made, you have to pay for private mortgage insurance (PMI).
  • It is often easy to qualify for this type of loan even if you have a low FICO score.
  • To get this loan, you must be a current member of the U.S. armed forces, a veteran, a national guard member, or an eligible surviving spouse.
  • You can get a Fannie Mae/Freddie Mac Loan  conforming loan if you have good credit, a steady income, and can afford the down payment
 

 

  • Maximum lending amount in 2019
      • High-cost areas $726,525
      • Low-cost areas $314,827
  • Maximum lending amount in 2019
    • $484,350
  • Maximum lending amount in 2019
    • $726,525

5. Your 401k

If you have a 401k or any retirement fund, this makes the lender more confident to give you a loan. Retirement funds can serve as a buffer in case you lose your job.

Think of your 401K as something that can tide you over when unexpected events affect your current cash flow. If needed, you can also tap into your 401k for the down payment for your first home.

I Need Financial Assistance, What Should I Do?

Income-based down payment grants

If you know where to look and who to ask, you may be eligible grants to buy your first home. The city government, counties and different states usually offer downpayment and closing cost assistance to eligible individuals.

A lot of people actually do not realize that they are eligible for down payment assistance. So when you ask “How much house can I afford?” it pays to do some research about first time home buyer grants.

Grants For College Graduates

Some states and cities have special grants to assist college graduates in buying their first homes. Offering this type of grant makes a place  more attractive to educated workers.

So, it pays to find out if the city or town you plan to buy a house in offers this type of program.

Neighborhood LIFT Program By Wells Fargo

Wells Fargo provides down payment assistance or grants to home buyers in chosen communities across the country. To be eligible, you must earn less than 120% of the median income in the area. Apart from down payment assistance, they also provide financial education to home buyers.

Good Neighbor Next Door Program

Professionals in the education, medical, and public safety industries may be eligible for a 50% discount on the list price of different properties under this program. This can make people more confident to buy their first homes and know how much house can I afford. To qualify, they must work full time in an approved occupation and must agree to live in the house for at least three years. If you belong in the indicated fields of work, then this might be worth your time.

Fannie Mae And Freddie Mac

Thousands of lenders from private companies are out there. Apart from these, there are also other mortgage lending institutions that help assist and provide affordable housing for first time home buyers. These are the likes of Fannie Mae (FNMA – Federal National Mortgage Association) and Freddie Mac (Federal Home Loan Mortgage Corporation). They are government-sponsored enterprises that provide stability and affordability to the mortgage market. They help ensure that the individuals or families that buy houses would have a stable supply of mortgage money.

Other Factors To Consider              

Age is a factor. You need to pay off the loan before retirement. Also, job security. Staying at a job for a long period can be a sign of stability to the lender. Your ability to pay monthly rent. This scores high personal points to the lender. You just have to prove that you can afford a substantial rent and is a good tenant.

Oh Wait, There’s More.

There are other financial considerations that you need to keep in mind when asking:  how much house can I afford? This pertains not only to how much monthly mortgage you can pay. There must also be enough money left for other housing-related expenses. These include interest rates, closing costs, insurance, and maintenance.

Other needs would be education, groceries, utilities, vacations, gas money plus other things a person or a family consider as necessities. Risk factors would also come into play. You must also take into consideration the size of your family and if any member requires special needs. You should also set aside emergency funds, in the event that a family member would need medical care.

So when thinking –  how much house can I afford –  what you want is a good balance of expense allocation. You don’t want to be in a situation wherein you barely have enough income to meet all your financial commitments. Be keen on searching for a housing loan and budget that truly works for you while also taking into account the other aspects of your financial life.                               

 

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