How do I know if I can afford to buy a home?

Many renters are shocked when they discover a monthly mortgage payment could be less than the rent they currently pay each month. There are several factors that must be taken into consideration to determine the size of the mortgage one can handle. Since the financial crisis the mortgage industry has undergone significant modifications, the lending process has changed, and mortgage lenders are likely taking extra caution when qualifying borrowers. Nonetheless, the main question being asked is how much home can I afford?   A home mortgage lender will take into consideration four basic rules

  1. The income of the borrower (or borrowers if more than one person is purchasing the house)

  2. The borrower’s debt to income ratio

  3. The down payment amount that a borrower can afford

  4. The monthly payment that the borrower can afford

  • Income  First, someone purchasing a house must determine his gross monthly income. This number will include not only the salary of the borrower or borrowers (depending on how many people are financing the mortgage) but also any other income such as alimony or child support, income from interest or dividends from stocks, or commissions from a job. When applying for a mortgage, the borrower should present documentation for these sources of income, as it will be the basis for other mortgage related calculations.  

  • Debt to Income Ratio  Second, the lender will determine the debt to income ratio, which is how much debt the person who is purchasing a house has compared to his gross income (before taxes, rather than net, which is after taxes). Debt includes such things as an existing home payment, a car payment, a student loan, a credit card payment, or other liabilities.  

  • Monthly Payments Third, the borrower should inform the home mortgage lender of how much he can pay on a monthly basis. If the borrower is currently renting a home or apartment, he can base that figure on his actual monthly expenses. The borrower should also factor in what percentage of his income he would feel comfortable spending on his mortgage when purchasing a house.

  • Down Payments Down payment amounts are becoming more of a major concern as every home mortgage lender has started to take more time to make sure people are being funded that have the ability to pay and have a vested interest into keeping their property over the long term. Gone are the days of being automatically offered 100 percent financing, meaning borrowers did not have to put any money down when purchasing a house. On average, borrowers will now see requirements ranging from 5 percent to 20 percent, depending on the credit score of the borrower. The borrower should determine how much of a down payment he would be able to make when purchasing a house based on his savings and his credit. He can then discuss this figure with the home mortgage lender, who can use this information to determine the size of the mortgage that the borrower can afford.