November 20, 2017
 
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How Much House Can You Afford?

Housing is typically a family’s largest budget item. Furthermore, it often causes the credit problems because many people rent or buy houses they cannot afford. If you’re on the market for your next home, or first home, the burning question is: How much can you afford?

Affordability is based on two factors:
1) how much a lender will allow you to borrow; and
2) how much down payment you have.

Debt-to-Income Ratio
Lenders generally use the 28/36 qualifying ratio to determine what percentage of your income is available for a mortgage payment after all other obligations are met. It includes interest, loan principal, insurance, and property taxes. Lenders allow up to 28% of your monthly gross income for housing expenses and up to 36% of housing expenses plus recurring debt. Recurring debt includes expenses such as credit card payments, auto payments, and child support. The ratio can change, depending on the loan. FHA and VA loans ratios are higher.

Example
Let’s say you make $50,000 annually.
Yearly Gross Income = $50,000 divided by 12 = $4,167 per month income
$4,167 Monthly Income x .28 = $1,167 allowed for housing expense
$4,167 Monthly Income x .36 = $1,500 allowed for housing expense plus recurring debt.

Some experts advise not to borrow the maximum amount a lender will allow because it can put you at risk—there will probably be some unforeseen expenses down the road. It’s a good idea to inflate your own budget. Also, put down as large a down payment as you can afford. The rule of thumb is for homeowners to put down at least 20% of the cost of the home.

If you’re uncertain as to whether you can live with your payment, try fitting it into your budget for several months. This way, you’ll have a better idea if you can handle it.

To learn more about preparing for home ownership, shopping for a home, or obtaining a mortgage, go to the U.S. Department of Housing and Urban Development website at www.hud.gov and look for a HUD Approved Housing Counseling Agency in your.

 

 

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