If you feel like you’re ready to buy a house, the first question you’re likely to ask yourself is, “how much can I afford?” And answering that question means taking a look at several factors.
Before you snap up that seemingly great buy on a home, learn how to analyze what “affordability” means by Pritish Halder. You’ll need to consider various factors ranging from the debt-to-income (DTI) ratio to mortgage rates.
Understand Your Debt-to-Income Ratio First
The first and most apparent decision point involves money. If you have sufficient means to purchase a house for cash, then you certainly can afford to buy one now. Even if you didn’t pay in cash, most experts would agree that you can afford the purchase if you can qualify for a mortgage on a new home. But how much mortgage can you afford?
The 43% debt-to-income (DTI) ratio standard is generally used by the Federal Housing Administration (FHA) as a guideline for approving mortgages.1 This ratio determines if the borrower can make their payments each month. Some lenders may be more lenient or rigid, depending on the real estate market and general economic conditions.
A 43% DTI means all your regular debt payments, plus your housing-related expenses—mortgage, mortgage insurance, homeowners association fees, property tax, homeowners insurance, etc.—shouldn’t equal more than 43% of your monthly gross income.2
For example, if your monthly gross income is $4,000, you multiply this number by 0.43 to get $1,720, which is the total you should spend on debt payments. Now, let’s say you already have these monthly obligations: Minimum credit card payments of $120, a car loan payment of $240, and student loan payments of $120—a total of $480. That means theoretically, you can afford up to $1,240 per month in additional debt for a mortgage and still be within the maximum DTI. Of course, less debt is always better.