Everyone enjoys browsing the real estate listings and circling the homes they would like to own. But it can get frustrating when you see some of the prices of homes today, particularly in or around major cities such as New York, Los Angeles or Boston.
Before you venture out and start looking at homes, you should try to get a reasonably good idea of how much home you can afford. This will be based on three primary factors:
1. How much money you have available for a down payment and for closing costs
2. The loan amount your lender will approve
3. How much you can spend on mortgage and interest payments
Typically, the down payment will be anywhere from 5 to 20 percent of the total purchase price of a home. Closing costs will generally run you somewhere between 2 and 6 percent. What Are Mortgage Loan Closing Costs?
When you apply for a mortgage, lenders will look at your credit reports, income, and various other factors before determining how much they will approve as a loan.
But it is the amount of your monthly payments, however, that will ultimately decide how much home you can afford. The general rule of thumb is that your mortgage payments should not exceed 28 percent of your income. Your entire debt-to-income ratio, which includes all recurring debt, including mortgage, car loan, and credit card payments, should not exceed 36 percent of your income. Find out more about Debt to Income Ratio for Mortgage Loans.
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