With 2024 fast approaching, many potential home buyers will be looking to make the big move once the real estate market heats up. In recent years we have seen rates go up from their historic lows and home prices skyrocket which left people priced out of buying their dream home. As we enter the home-buying season, there is one question that must be answered: “just how much house can I afford”? If you’re one of the people asking this exact question, then head to the Mortgage Center on the UnitedOne website to get the answers you need.
An important metric to consider when figuring out how much house you can afford is the Debt-to-Income ratio (DTI). The DTI is calculated by dividing your monthly debts by your gross monthly income. DTI is as important as your credit score when it comes to purchasing a home. There are two types of DTI that should be taken into account:
Front-end DTI is calculated by combining your household expenses (monthly mortgage, property takes, and homeowners’ association fees) and dividing them by your monthly gross income.
Back-end DTI is calculated by combining your household expenses and all monthly debts (student loan, credit card payment, and car loan) and dividing it by your monthly gross income.
Keep in mind that DTI does not take into account your monthly expenses such as groceries, utilities, and transportation costs. It is important to consider those expenses and current mortgage rates when you’re deciding what mortgage payment you can afford.
The 28 / 36 Rule
Now that we can calculate the monthly DTI, we can figure out what kind of loan we can expect. Banks and credit unions use the 28/36 rule as the formula to figure out which payment you can afford on the monthly basis. The 28/36 rule means that you don’t spend more than 28% of your gross monthly income on housing expenses and you don’t spend more than 36% on all your monthly debt payments.
Many financial experts will argue that you should be using 28% and 36% of your net income (take home money after taxes and savings) to calculate your ideal mortgage payment. This is a more conservative approach to home-buying that exists to prevent you from becoming “home poor” and taking out a mortgage that you can’t really afford. In order to make the best financial decision for you and your family, you can use mortgage calculators and home buying checklist on our site.
Private Mortgage Insurance
If you don’t have 20% of the total home price available for a down payment at the time of purchase, you can expect to pay Private Mortgage Insurance or PMI. PMI exists to protect the lender in case you stop making your payments on your home loan. If you have to pay PMI, you should be factoring this expense into your monthly home payment when you budget.
Our Mortgage Specialists can help you determine how much of a house payment you can afford! If you have any questions about the home buying process or if you’re looking to start on your home purchasing journey, contact Mortgage Specialists at UnitedOne or apply online and we will help you get started.
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