Are you a first-time homebuyer wondering how to determine how much house you can afford? Trying to figure out how much you should spend on a home and just how much you can actually afford on a mortgage can be overwhelming. Figuring out these things does not have to be nerve-wracking if you know who to turn to! Keep reading to learn more about assessing your finances and preparing to buy just the right home for you.
Your Financial Situation: 4 Factors to Analyze
One of the first things you need to do when determining how much house you can afford is to look carefully at your current financial situation. There are four key factors when trying to determine how much house you can afford. They are household income, monthly expenses and debt payments, your credit score, and how much you have set aside in savings.
It seems intuitive that a higher income would mean that you can afford to spend more on monthly mortgage payments, that you should be able to choose a home from a wide range of prices. However, the amount you have available for a new home also depends on how much money you spend each month – how much money you have leftover for a mortgage after paying monthly expenses and making debt payments.
If you are a Veteran and plan to use a VA loan, lenders will look at how much residual income (LINK) you have each month to determine whether to issue you a home loan. Also known as discretionary income, residual income is the amount of money that remains after all monthly debts and expenses have been paid. Lenders will strongly scrutinize your residual income if you happen to have a very high debt-to-income ratio.
Monthly Expenses and Debt
You will need to analyze your debt-to-income ratio and see what you can do to improve this measurement. Your debt-to-income ratio is a metric that affects the kind of loan rates and home loan you will qualify for. Lenders will calculate this by weighing your monthly expenses and debt payments against your income to see just how much you really have available for mortgage payments. To figure out your debt-to-income ratio, the sum of your monthly debts and expenses is divided by monthly gross income, resulting in a percentage. There are two versions of this metric used by lenders to judge whether you are a risky borrower: the front-end ratio and back-end ratio.
Front-end ratios are calculated by dividing your total housing costs by gross income. To reiterate, only housing costs are included. The back-end ratio, however, adds up all major existing debt plus housing expenses and divides that sum by your gross income. VA lenders ignore front-end ratios and only use the back-end ratio. So, if you are a Veteran and plan to use your VA home loan benefits, only your back-end ratio will be considered.
Another guideline to consider is the “36 percent rule,” which is used by financial advisors to set you up for financial stability, a budgeting tool that will help you make smart decisions and maintain financial security over time. The guideline says that no more than 36 percent of your gross income should go toward debt payments, including mortgage and housing costs, credit cards and loan payments. This guideline allows you to have funds on hand for unexpected events or emergencies and has room for you to continue building a savings account and contribute towards your retirement.
Lenders will definitely care about your credit score. It helps them to see if you pose a risk for defaulting on your mortgage in the future, by judging from your credit history and how you handled your finances in the past. A lender will feel more confident in a borrower with a good or high credit score. A strong credit score might even mean being able to borrow a higher mortgage amount or getting a low rate.
Lenders will check your savings for several different reasons. Your savings will tell the lender if you can cover the costs of down payment, if a down payment is required, and to see if you can afford closing costs. Lenders will also want to know if you can continue to make monthly mortgage payments just in case your income fluctuates and dips. At a minimum, you should have three months’ worth of mortgage payments in your savings account. It’s not a bad idea to keep as much as six months worth on hand, just in case you lose your source of income and it takes some time to find a job. So, before buying a house, ideally, you should have enough in your savings account to cover a down payment, closing costs, and several months’ worth of emergency funds.
Crunch the Numbers to See How Much House You Can Afford
To determine a realistic mortgage payment, multiply your monthly take-home household income by 25 percent. This will give you a rough estimate of your maximum mortgage payment. However, the amount you spend each month toward your new house will need to cover more than just payment on the principal. You will also need to consider the cost of interest, property taxes, homeowners insurance, and HOA fees.
Calculating a future mortgage is important because it simplifies real estate decisions and gives you a very concrete, clear picture. To make things easier, get an estimate of your monthly home payments by using our VA mortgage loan payment calculator. The SoCal VA Homes mortgage loan payment calculator is an easy and quick way to get a rough estimate of a future mortgage payment!
Contact SoCal VA Homes Today!
After serving and sacrificing for your country, you deserve benefits like a VA home loan. We want to make sure the process of using those benefits goes as smoothly as possible. We hope you will check out our set of programs for buying a house using your VA home loan benefits. The Dreamweaver Home Purchase Process™ is our flagship program. With this program, you get a fully custom renovated home with zero down and zero closing costs. The 100% Construction Loan for Veterans involves building a brand new house from the ground up with zero down and zero closing costs. The Veteran Angel’s Program is a favorite among our clients because our secret weapon is effective and delivers results. All three of our programs are powerful, guaranteed to make the process of buying a home as easy on you as possible!
If you are still wondering what kind of payment you can be responsible for on a monthly basis, our blog contains really helpful information about affordability and numerous other topics on the home buying process.
Contact So Cal VA Homes today and schedule a time to talk with us! We would love to sit down and discuss your home purchase. Give us a call today at (949) 268-7742! We look forward to talking more about home affordability and using your VA home loan benefits to buy your home!