A house is one of the biggest purchases you will ever make. Therefore, determining how much you can actually afford is a major step in the home-buying process. While this may seem like a daunting task, it’s actually fairly straightforward when you know the correct steps.
When figuring out how much a buyer can afford on a house, mortgage lenders in Philadelphia, PA, typically start by weighing how much money the buyer has coming in compared to how much they have going out. The money coming in could include their earnings from jobs, investments, and other forms of income, while the money going out includes debts related to credit cards, student loans, and car payments.
Beyond that, there are many other factors to consider when determining how much you can afford when purchasing a house.
How much mortgage payment can you afford?
Calculating how much of a monthly mortgage payment you can afford requires taking a look into specific areas of your finances. For instance, any Philadelphia mortgage company will examine your household income, your monthly debts, and how much savings you have for a down payment. Comparing this information will give the lender a better understanding of what you can afford.
While monthly income and debts are typically stable, unexpected expenses may arise and impact your savings. Because of this, it is a good idea to have at least three months of payments, such as your monthly debts and housing payment, in reserve. Doing so will help you make your mortgage payment even if something unexpected arises.
Does your debt-to-income ratio impact what you can afford?
In short, yes. Mortgage lenders use an important metric known as the DTI ratio when determining what you can afford. DTI, which stands for debt-to-income, is a ratio that compares your monthly debts to your pre-tax income. Monthly debts will also include your mortgage payment as well.
What is the 28/36 rule?
Most mortgage lenders in Philadelphia, PA, advise following the 28/36 rule when calculating how much of a house you can afford. Essentially, this rule states that you shouldn’t exceed 28 percent of your total monthly income on housing costs and no more than 36 percent on your total debts. So, for instance, if your monthly mortgage payment is $1,260 each month and you bring in a monthly income of $4,500 (before taxes), then your DTI ratio will be 28 percent (1260 / 4500 = 0.28).
If you reverse the formula above, you can find out what your housing budget must be by multiplying your total income by 0.28. Using the example above, to achieve a 28 percent DTI, you could have a mortgage payment of $1,260 (4500 x 0.28 = 1,260). What you have left over in your monthly income will need to be budgeted out for other expenses, such as food, transportation, and savings.
Does your credit score impact your affordability?
Since your credit score serves as the foundation of your finances, it plays a crucial role in determining your overall mortgage rate. The higher your credit score, the lower the mortgage rate you’ll be asked to pay. Because of this, it is vital you increase your three-digit credit score number as fast as possible if you’re looking to buy a house. A higher mortgage rate will severely affect the type of house you can afford.
Of course, mortgage rates are also influenced by elements out of your control, such as the state of the economy, inflation, stocks, The Federal Reserve, and more. However, it’s best to focus on the components you can control, such as your credit score. There are numerous ways to raise your credit score, but one of the most crucial steps is making payments to associated debts on time, as your payment history plays a large role in determining your borrowing ability.
How down payments impact affordability
Another aspect any Philadelphia mortgage company looks at is the amount of down payment on a house. The higher the down payment, the lower the mortgage loan needed. By making a higher down payment, you essentially reduce your loan-to-value ratio, which compares how much money you’re borrowing to the value of the property you’re buying.
Let’s take a look at an example of how a down payment could affect your affordability. Let’s say you have an annual salary of $70,000. Since you’re trying to keep the 28 percent rule intact, you make a down payment of 10 percent, which means your home budget would shrink down to $275,000, thus decreasing the amount of money and interest you will owe over the life of the loan.
Let’s take a look at an example of how a down payment could affect your affordability. Let’s say you have an annual salary of $70,000. Since you’re trying to keep the 28 percent rule intact, you make a down payment of 10 percent, which means your home budget would shrink down to $275,000, thus decreasing the amount of money and interest you will owe over the life of the loan.
Does the type of home loan affect affordability?
Whether you are a seasoned or first-time buyer, you may have several options in terms of which type of home loan you get. This could impact what you may be able to afford in the following ways.
Federal Housing Agency (FHA) mortgage loans are available to buyers that have a credit score of 500 or higher. This type of loan can help a buyer get into a house with less money down. You’ll only need a 10 percent down payment if your credit score is below 580, and you’ll only need a down payment of 3.5 percent if your score is 580 or higher.
VA loans are available for active duty or retired service members. The U.S. Department of Veterans Affairs offers these homebuyers down-payment-free mortgages. These loans include competitive mortgage rates and have no limits on the amount you can borrow.
Contact a Philadelphia mortgage company
Trio Capital has years of experience helping homebuyers afford the house of their dreams. If you need help determining how much of a home you can afford, contact their skilled team to get out a quote today. Trio Capital is a leading mortgage lender in Philadelphia, PA, and they have the tools necessary to calculate how much money you need to afford a house.
