Sitting down and crunching the numbers before shopping for a home is important. You will want to make sure the homes you are looking at have an affordable monthly mortgage payment that is reasonable given your lifestyle. Several factors affect affordability, so be sure to layout your facts and be transparent about your finances.
The first step when finding out how much home you can afford is looking at your income streams. The income is the total amount of money earned for the year before taxes. The amount can be found at the bottom of your W2 form. Make sure to include all revenue streams, like all alimony, investment profits, rental earnings, etc. If you have one, include your co-borrower’s income as well.
Identify how much debt you have. Car payments, student loans, credit card payments, etc, are a few examples of the many possible debts you may owe. Add up your monthly payments to see how much debt you have.
Debt to Income Ratio
Now that you know your total income and monthly debts, it’s time to make sense of them. Your debt to income ratio is the number of monthly payments you have divided by your monthly income. Lenders use the ratio to determine your ability to manage payments and your trustworthiness to repay the loan. The average debt to income ratio is 36%. As a general rule, 43% is the highest debt to income ratio recommended to qualify for a loan. The lower the ratio, the better your chances of getting approved!
A down payment is the amount of money you need upfront to pay for a home. It ranges from 3%-20%. The higher your down payment, the lower your monthly mortgage payment will be. To understand the minimum down payment amount, multiply the cost of the property by at least 3%. This will show you how much money you will need at the time of purchase to pay for the home.
Interest rates are another factor that influences how much home you can afford. This is the amount that the lender charges you for taking out the mortgage. The market conditions influence the interest rate, but your credit score and down payment play a part as well.
Do you want to learn more about how much home you can afford on Nantucket Island? Contact Jordan Real Estate for more information about buying a home in your price range.