Before you buy a home, it is a very good idea that you know beforehand just how much of a house payment you can afford each month. Many people lose their homes each year simply because they cannot keep up with the payments. Here are some tips on how you can determine just how much of a house payment you can afford.
Look at Your Overall Debt
Lenders will typically have a limit on how much debt a home buyer can have. If your debt to income ratio is higher than this, you will not get a mortgage. The maximum amount of monthly payments toward all debt is about 36 percent, but some lenders will go much higher than this, such as the FHA which sets the limit at 43 percent of your pre-tax income. The FHA also wants your mortgage and monthly tax payments to be less than 31 percent. Realtor.com suggests that your housing, insurance, and tax payments need to be less than 28 percent, but some situations may cause this number to be overlooked.
If you have a lot of debt, it is a good idea to try and reduce it before buying a house. Lenders like to know that you can control debt, which will be evident from your credit score. Having a good credit score will also enable you to borrow more money and get better interest rates, which will help keep your house payment more affordable.
Verifiable Income Is a Must
The above article at Realtor.com mentions that when you determine your debt to income ratio, you can only use income that is reported on your tax forms. Any other income is considered non-verifiable and will not count toward determining how much of a loan you can get.
Save Money by Making a Large Downpayment
While not everyone can afford to put down a large downpayment, the more you put down the more money you will be able to save in interest. Also, the smaller your monthly house payment is going to be.
If you can put down a 20 percent downpayment (or more), this is ideal. It will save you hundreds of dollars, possibly thousands, each year because you will be able to avoid having to pay for private mortgage insurance (PMI).
Different Types of Mortgages Will Have Different Payments
The payments you would make on an adjustable rate mortgage will typically be less starting out than what you will pay on a fixed rate mortgage. However, caution needs to be given and you need to understand what could happen if the economy changes for the worse before making this choice. Right now, more people are choosing to go with fixed rate mortgages.
Use Affordability Charts to Help Determine Desirable Cost
Many websites have affordability charts to help you figure out just how much you can afford each month. The charts are different, so you will want to use two or three for better accuracy. Three calculators that you might want to use are at the Washington Post, Money.MSN.com, and at BankRate.com.
Talking to various lenders will also let you choose a mortgage that could give you better interest rates and lower monthly payments. By shopping around, you will be able to find an excellent mortgage for your new home.