One of the most common questions, when you start your home search, is how much home can I afford or how much can I pay monthly.
These two amounts, either the monthly payment or the total cost of the house, will depend on several factors.
Income, is one of the main requirements, your gross salary is evaluated, which would be the amount without deductions. No less important is the constancy and how long you have been earning that income; most programs look at least two years of employment, although if you have less time or if you have intervals without work does not rule you out, everything will depend on other positive factors that make your loan attractive to the lender.
Debt, banks look at your level of debt in relation to your income. You could have an excellent salary but if your debt consumes 80% of it it would be a red flag. Not least how on time you are meeting your debt commitments; low debt level, but with accounts in collection is another negative point.
Ratio, banks rely heavily on two indicators: front-end ratio and back-end ratio. The front-end is the amount you allocate to the house payment. You calculate it by adding the monthly rent payment or if you are a homeowner the mortgage payment: principal + interest + tax + insurance and divide it by your gross monthly income. For example if you pay 1500.00 rent and your gross monthly income is 4,500.00, your front end ratio is 0.33(33%).
The back-end ratio or debt to ratio, adds to the mortgage or rent payment your monthly recurring debts. Based on the above example, if this person has a personal loan of 450.00 then we would say that (1500.00 + 450.00) = 1,950.00 / 4,500.00 = 0.43(43%).
Not all payments you make are considered for the debt calculation, the easiest way to find out is if the debt appears on your credit report.
Considered
- Mortgage
- Car, Student or Personal Loans
- Credit Cards
Not Considered
- Electricity, Water, Phone payments
- Transportation costs
- Meal Expenses
Credit score is a number that measures the level of risk you represent to the creditor when you apply for credit. The three major credit bureaus (Equifax, Transunion and Experian) use the same calculation method called FICO, providing a range from 300 to 850.
The higher the number, the lower the risk, and therefore the better terms you can get when borrowing money.
Down payment, what you put down increases the total value you can borrow, and at the same time may reduce how much you pay monthly. For example if you are buying a property with a value of 100K, and you put 20% down or 20,000.00, you would not have to pay pmi(private mortgage insurance) on your loan, although it is good to say that many loans require only a 3% down payment and in other cases like VA loans (veterans) or USDA rural loans it is 0%.
Terms or length of the loan, the most common terms are 15 years and 30 years. The shorter the term the lower the rate, but the higher the monthly payment, since you would be paying in less time.
Other factors that are taken into account are property taxes, which vary by state, county or zip code and range from 0.30 to 2.13 with a national average of 0.83%.
Property insurance, which may or may not be high depending on how many claims there are in the area. If you live in an area where weather phenomena could occur it is a factor that increases the price.
Another way to verify this is to play around with our affordability calculator.