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You’ve Rented and Now it’s Time to Buy a Home: How Much Can You Afford?

If you have been renting for a while, you are probably about ready to say goodbye to your landlord or apartment complex. Wouldn’t it be nice to be able to paint the walls whatever color you want and maybe dig up a space in the yard for a garden? There comes a point when most people start thinking about how wonderful it would be to finally buy a home. If you are at this point, then you are probably wondering if you can even afford to buy a home. Well, you may be interested to learn that in many cases, house payments are less expensive than rent. So, the real question is not if you can afford to buy, but how much home can you afford.

Time to buy a home

How Much Do You Have for a Down Payment?
Many years ago, it was the norm for people to save for years to have at least 10 percent to put down to even get approved. Obviously, the more you put down the lower your payment will be and the better chance you will have of getting approved. However, you do not necessarily need that much these days. The average FHA loan requires 3.5 to 20 percent down. So, if you are approved for 3.5 percent down on a $200,000 house, you will need about $7,000.

There are “no down payment mortgages” available through the Veterans Administration, if you qualify. An important tidbit of information to keep in mind is that closing costs are not included in the down payment. These fees can run between 2 and 5 percent of the total home price.

How’s Your Credit?
Do not assume that you have to have perfect credit to get approved for a mortgage, because you don’t. However, your credit will play a role in the rate you qualify for, which will influence your monthly house payment. A lender will look at your credit score. This is based on payment history, types of outstanding credit you have, length of overall level of credit, and the number of inquiries that have been submitted to obtain new credit. You should have a good idea of what is on your credit report before you even get started.

What is Your Debt-to-Income Ratio?
If you have ever financed a car, you may have overheard this term tossed around the dealership or finance office. Your debt-to-income ratio represents the amount of money you make compared to your existing monthly debt. Most lenders prefer this number to be around 36 percent, including your anticipated mortgage payment. This leaves plenty of money left over for groceries, utilities, unexpected car repairs, etc.

Looking for a precise example to wrap your brain around? If you have $500 in monthly debt and make $5,000 per month, your debt-to-income ratio is only 10 percent. Therefore, you could be approved for a home that would carry a $1,300 monthly mortgage payment. Note that $1,300 would have to include private mortgage and homeowner’s insurance, property taxes, and possibly even community fees.

What Does this All Mean?
Home loans are approved on a case-by-case basis and rates are determined by a number of factors. A person with poor credit could end up with a better rate than someone with modest or good credit, if they have a low debt-to-income ratio, large down payment, and significant time on the job. Buying a home is a big decision, but definitely a rewarding one. Just make sure you are fully prepared and understand your options before you begin house hunting.