Q. How much home can I afford?
A. Home affordability is a major issue, especially after the recent credit crunch and in light of the new legislation (Dodd – Frank Act) that requires lenders to verify that mortgage loan applicants have the “ability to pay.” The amount you can borrow plus the additional cash you can pay will determine the price you can afford. Depending on the lender and the type of loan, the minimum required down payment will vary. However, the more money you are able to put down, in addition to the proceeds of your mortgage loan, the more home you can afford.
Certain government-sponsored loan programs will provide larger mortgages (some with little or no down payment) than conventional lenders, who require a twenty percent (20%) down payment, will offer, but your income and credit must be sufficient to qualify for the amount of loan you are seeking. In determining the amount of loan you qualify for, lenders will consider the following:
- House payment: Your house payment, including mortgage, taxes, and insurance, should be no more than 28% of your monthly pre-tax income.
- Total debt: Your total debt, including credit cards, car payments, student loans, and the like, exclusive of monthly expenses such as electricity and groceries, should be no more than 36% of your monthly pre-tax income.
- Credit score: Although your credit score does not directly determine how much home you can afford, it may, to some extent, determine how much money a lender will allow you borrow. It also affects your interest rate, which can raise or lower your monthly payment, and hence your debt load percentage.