Home Buying Tips: What Can I Afford?
If you’re in the market for a new home, the first thing you need to do is determine your price range.
Here are a few tips to consider when estimating how much house you can afford.
Use your salary as a guide. While estimates vary depending on whom you ask, a good rule is to search for homes that are about 2.5 times your household annual income (pre-tax). If you have very little debt, you can increase that number a little.
Calculate your DTI. When you apply for a mortgage, lenders will look at your debt-to-income ratio (DTI) – essentially, how much you earn versus how much you owe. The lower your DTI, the better (most lenders like to see a ratio of about 43% or less). By calculating your DTI in advance, you’ll have a better idea of what you might expect in terms of a loan.
Set aside money for additional costs. Closing costs can be as much as 5% or 6% of your loan amount,
so you’ll need to include that as part of your home buying budget. Keep in mind, too, that once you’re settled in your new home, there will be expenses other than just your mortgage to consider. Build in a monthly amount for home repairs and maintenance.