Buying a house is exciting, especially as you begin to tour new places and eventually find what’s perfect for you. But what if you’re wondering, “how much house can I afford?”
Set realistic expectations by considering your finances, borrowing options, and the total costs of buying a home. Keep reading for more tips on how to determine how much house you can afford.
Your DTI and Housing Ratios
Mortgage lenders calculate your current debt based on how much money you make. This is known as your debt-to-income (DTI) ratio.
The most important ratio referenced by lenders is your front-end and back-end ratios. Your front-end ratio is calculated by taking your proposed housing expense divided by your gross, pre-tax income. Keeping this percentage right around 28% is the most competitive offering you the best options as a homebuyer.
The other ratio involves all your current loan payments – including housing expenses and monthly debts (but not utilities or other living expenses) divided by your gross monthly income. Keeping this number right around 36% ensures you won’t be stretching limits in affording a new home. This is referred to as your back-end ratio.
Know Your Credit History
When you apply for a mortgage, your credit reports from the three main bureaus – Equifax, Experian, and TransUnion – will be obtained to determine your creditworthiness. This provides a summary of your credit history including your credit card accounts, loans, balances, and payment history.
Lenders will also analyze how much of your available credit you actively use, known as credit utilization. Maintaining a credit utilization rate at or below 30 percent boosts your credit score and demonstrates that you manage your debt wisely. These determine your FICO score, a credit score model used by lenders, ranging from 300 (poor) to 850 (exception).
The Importance of the Loan-To-Value (LTV) Ratio
A Loan-to-Value ratio, or LTV ratio, is a key factor in determining your ability to qualify for a mortgage and how much home you can afford. The LTV ratio represents the amount of your mortgage divided by the value of the home you’re planning to buy.
Your LTV ratio is important because lenders want to be confident that you’ll be able to fully repay the loan. This ratio is the most limiting factor on the price of a home you can purchase. At Baton Rouge Telco, we ideally want to see an 80% LTV, meaning a 20% down payment is preferred.
Use this calculator to find the best option for your needs and budget.
The Down Payment
The down payment is how much you expect to put down or contribute to the purchase of your home. Whatever you don’t put down will likely have to be financed. Your down payment plays a big part in determining how much home you can afford.
The more money you put down, the more home you can afford to buy. If you don’t have a lot of money saved, you could still get a mortgage with little-to-no money down; it would just decrease the amount of house you could afford to buy.
You can use money from savings, investments, or other sources to make up your down payment. It is recommended that you put down 20% of the home’s purchase price; although government-specific loan types may enable you to put down as little as 3.5% or nothing at all.
Lowering Your DTI
Lowering your DTI can have a big impact on the type of financing you can get. If you have some flexibility when you plan on buying, taking time to lower your DTI (and improve your credit score) can save you a lot of money over the life of your loan.
If you plan on making any big purchases – such as a car or new appliances – wait until after you’ve bought your home. This will ensure you are not overextending yourself with a variety of debts. If you plan on living with a partner, parent, or roommate in your new home, bring this up early on in the approval process. Lenders could be able to include some of their income in your DTI calculation.
How Much House Can I Afford? Let Us Help!
At Baton Rouge Telco, we can help you answer the question, “how much house can I afford?” We offer a variety of home loans made for your needs!
Home affordability is front of mind since our staff of experts handles everything locally. That means fast approvals and even faster closings.
Click below to get started today on choosing the best home loan for you!