Can I afford to buy a home? - Can I afford to buy a home? There are many different factors that go into deciding if you can afford to purchase a home. The most important factors are what is my present income and how much do I have saved. Borrowers can qualify for many different loan purchase programs however they must decide if they can afford it.

As far as most banks loan qualification guidelines are concerned, home owners should have debt payments, including mortgage and other necessary housing expenses, of no more than approximately 45% of gross income. However, since poeple have different spending habits, homeowners should decide for themselves how much of a mortgage can they afford.

A good rule of thumb is to keep your mortgage payment approximately the same as your current rent payment. If you have been able to pay a rent payment every month, then you should be able to afford a mortgage payment of the same amount.

Regardless of where you live, how much you earn or what type of house you are shopping for, as soon as you find out how much the seller is asking, your first reaction might be something like, “Wow! That's expensive!” Your initial assessment is correct. With prices rising quickly, particularly in areas like New York and Boston, even starter homes can carry hefty six-figure price tags. Your next reaction is likely to be, “Can I afford that?”


Generally speaking, most prospective homeowners can afford to mortgage a property that costs between 2 and 2.5 times their gross income. Under this formula, a person earning $100,000 per year can afford to mortgage between $200,000 and $250,000. But this calculation is only a general guideline.

Ultimately, when deciding on a property, you need to consider a few more factors. First, it's a good idea to have an understanding of what your lender thinks you can afford - to gain a precise idea of what size of mortgage their clients can handle, lenders use formulas that are much more complex and thorough. Secondly, you need to determine some personal criteria by evaluating not only your finances but also your preferences.

Many brokers are able to perform a rent vs. buy analysis that will not only compare your monthly payments, but also the potential tax savings, the appreciation of the home, and other factors you may not have considered. In many cases it is actually cheaper in the long run to purchase a home than to continue renting.

When considering to buy a home and figuring out how much you can afford, it is a good idea to sit down with your spouse and calculate your total monthly expenses. This should include all of your monthly bills such as car payment, credit card payments, cell phones payment, personal loans, cable/satellite television bills, etc... This way you can calculate how much you can comfortably afford to spend on a monthly mortgage payment and not fall into the trap of buying a home that is out of your price/payment range. Many homeowners and potential homeowners can qualify for homes and monthly payments that are much, much more expensive than what they can comfortably afford, while living the same lifestyle that they are used to. Please remember just because you can qualify for a $400,000 home does not mean you have to buy a $400,000. Buy a home because it meets your needs and most importantly it is within your budget comfortably. Allowing your home to own you instead of you owning your home has been an increasing trend over the past few years with the availability of all of the new mortgage programs and competitive underwriting programs available out there.

Can you afford to continue renting? Home ownership is the most popular investment tool. With a mortgage you gain equity be paying down principle as well as through property appreciation. You can also use the interest paid on your mortgage as a tax deduction. To determine if you can afford a home you need the experience and expertise of both a good loan officer and a good real estate agent. Together they will help you determine how much you can afford and if there are homes in your area that meet your preference and price range.

When someone asks "can I afford to buy a home?", he or she is often thinking of the short term of 1 or 2 years.
Instead, try thinking of the long term.
In many parts of the country, over a period of several years, homes increase in value by at least 5% a year. So, home owners have an asset that is growing.
At the same time, if their mortgage has a fixed rate, their housing expenses are staying relatively constant, unlike renters, who are seeing an increase in housing expenses generally of 3% to 5% a year.
So, in the long term, home owners have less money going out and an asset increasing in value.

Investing in a home is still one of the safest places to invest your money. Real estate will almost always appreciate and give a good return on the initial investment.

Why should you pay for someone else's mortgage? In a sense that is what you are doing when you are renting. Contact your mortgage professinal to see what price range of home is right for you and let your money work for you and not your landloards,

How the lender decides how much I can afford. - How does the lender decide the maximum loan amount that I can afford?
The lender considers your debt-to-income ratio, which is a comparison of your gross (pre-tax) income to housing and non-housing debts. Non-housing expenses include such long-term debts as car or student loan payments, alimony, or child support. Typically, mortgage payments should be no more than 29% of gross income, while the mortgage payment, combined with non-housing expenses, should be no more than 41% of income. The lender also considers your cash available for a down payment and closing costs, credit history, and employment history when determining your maximum loan amount.

The lender decides how much you can afford mainly by calculating your debt to income ratio, also commonly referred to as DTI or DR. Your debt to income ratio is calculated by figuring out what your average monthly income is and what your total monthly debts are and then dividing the two numbers. For example you have:
Auto Loan: $300 per month Monthly Income: $3,000
Credit Card 1: $150 per month
Credit Card 2: $100 per month
Total: $550 per month
Therefore, your DTI would currently be: 3000/550 = 18.33%
Thus, if you were able to go up to a total DTI of around 40% then we could now calculate how much of a home you can afford. $3,000 per month income x 40% = $1,200 total monthly expenses
$1,200 (40% ratio of income allowed)- $550 (current monthly debt) = $650 (maximum mortgage payment allowed)
With this figure of $650, we can go back in and plug in a loan amount, an interest rate, and a loan term and be able to calculate how much of a home loan you can afford. Please contact us if you have any questions about any of the information or need further clarification regarding any of the information contained on this page.

As a borrower you must keep in mind that bills like grocery, telephone and various other monthly and dialy expenses are not figured into the DTI ratio. As a borrower you will need to use common sense and restraint when deciding how much you can afford for a monthly mortgage payment.

Lenders can approve you for a much higher payment than you may be able to practically afford. Don't fall into the trap of choosing a home or cashing out more money than you can afford to pay for comfortably. If you do not have substantial money saved for a "rainy day", it may be prudent to choose a mortgage which allows you to make a smaller payment than the maximum which you can afford. In this way, you can make the maximum payment when you can afford it, but can drop down to a lower payment when necessary to prevent a short term cash crunch from impacting your credit.