Housing costs continue to rise in many markets. For those looking to purchase a home, calculating how much you can realistically afford based on your income and assets is an essential first step to finding a home.
The 28/36 rule can be seen as the starting point for determining how much house you can afford. This rule denotes that the total expenses for a household cannot exceed 28% of its gross income and that the total indebtedness cannot exceed 36% of its gross income.
For example, if your household brings home a monthly income of $5,000 and you want to adhere to the 28/36 rule, you could budget $1,200 for a monthly mortgage payment and housing expenses and $600 for other types of loan repayments. If you don’t have other loans to repay, you can increase your housing budget.
Pre-qualification and refining your home search
Getting pre-qualified is an important step in the homebuying process. It ensures you’ve taken the proper steps to show you can afford a home you’re interested in purchasing. This is especially important in a multiple bid situation.
To facilitate home shopping, it is essential to not only determine the median home value in the neighborhoods you are interested in but also to drill down into the location’s specifics, the age and condition of the type of home you find acceptable. A small fixer-upper in a hot neighborhood might be valued at close to the price of the lot, while a new custom spec home might be three to five times as much.
Calculating by working backwards from the down payment
The biggest challenge for most homebuyers, particularly first-time homebuyers, is coming up with the 20% down payment. At First Centennial Mortgage, we offer down payment flexibility, which allows for as little as 3% down payment.
For homeowners who are inclined to do some renovation, Fannie Mae offers a homestyle renovation loan that incorporates a reserve for doing work, including extensive interior renovations.
Once you have determined the amount of down payment you can afford and that is required, you can use our mortgage calculator to determine the price of the house you can afford. Whether you are approved for a home loan is based on specific underwriting criteria, including your credit history and scores, and the ratio parameters described above.
First Centennial Mortgage provides home loans and financing to suit a wide variety of buyers and home purchases. We invite your inquiries and look forward to helping you with your mortgage needs.