Buying a home is an exciting time for many, as homebuyers shop with their families and futures in mind. You’re looking for a secure and comfortable home with all the amenities you desire, but the biggest determining factor for any homebuyer is often the cost of the home. Knowing how much you can afford is a great first step to eliminate some anxiety by allowing you to narrow down your choices, and thus ensuring you won’t fall behind on mortgage payments.
Home buying factors to consider
In order to estimate how much you can afford, some of the things you need to consider are your debt-to-income (DTI) ratio, the size of your down payment, property taxes, homeowners insurance and private mortgage insurance (PMI).
- Debt-to-income ratio - As a rule of thumb, your DTI ratio shouldn’t exceed 36%. That means your mortgage payments and other debts should only equate to 36% of your gross annual income, with the remainder of your income set to cover living expenses and savings goals. This percentage is also what most lenders use as a guideline for whether you will qualify for a mortgage loan. Try our debt-to-income calculator to see if your monthly debts exceed the recommended percentage.
- Down payment - Not every home purchase has a down payment requirement, but paying less than 20% may require you to purchase mortgage insurance. The larger your down payment, the lower your monthly payment becomes.
- Property taxes - Real estate property tax is a flat-rate percentage charged against a taxpayer's property value. Property taxes vary by jurisdiction and the cost currently can range from about 0.2% to 3% of your property’s worth. Property taxes are enforced by local government and can be a large amount added to the total cost of owning a home. Understanding how much more you’ll need to budget for the property tax is an important part of decision making.
- Homeowners insurance - Most lenders require homebuyers to purchase homeowners insurance to protect the house against damage, since your lender technically owns the property until the mortgage is paid in full. The cost of your homeowners insurance policy may increase or decrease depending on whether the home has higher risk factors, such as swimming pools and trampolines, or risk reduction measures, such as security systems and sprinkler systems. Your credit score and claims history are also taken into consideration.
- PMI - Private mortgage insurance is another fee you may need to add to your expenses when purchasing a home. Learn more about PMI to find out how to avoid additional costs.
These are just some considerations to keep in mind when estimating what type of home you can afford. Getting pre-qualified or pre-approved for a mortgage loan before shopping for your new home is important to help determine how much of your income will go towards your monthly debt expenses. Learn more about the mortgage loan options and get pre-qualified.