When working out the amount you are able to afford when you purchase a home is based on a few basic principles. One of the best ways to make this calculation is to use one of many bond-affordability calculators online to help you understand your affordability when it comes to home buying.
Your affordability is based on your after-tax salary, your monthly expenses (total), the loan term which is a number of years you have chosen to pay off the bond, and the interest rate are all used to make an estimate of the loan amount that you will be able to afford along with your monthly repayment amounts.
Great advice when it comes to buying your first home is to have in reserve, 3 months of housing payments along with your usual monthly expenses. This provides you with an added buffer to protect yourself from an unexpected event.
The Factors That Help Determine “How Much House Can I Afford?”
To make a decision on “how much house can I afford” the standardized rule involves that your expenses on a monthly basis do not exceed 36%. This 36% rule is associated with the division of your debt payments (monthly) and your mortgage payments (monthly) by your monthly income (gross).
The Key factors involved in calculating affordability are 1.) Your monthly income, 2.) The funds you have available to cover the closing costs and down payment, 3.) Your expenses on a monthly basis and 4.) Your current credit profile.
Income is defined as money that comes into your bank account on a monthly basis or regularly like a salary or an income from your investments. This income is what assists in the establishment of a baseline in regards to what you can actually afford.
2. Funds Available
This is the cash amount that you already have ready to cover the closing costs and for a down payment. This can come from investments, savings or other types of sources.
3. Expenses And Debts
It is vital that you also consider your additional monthly obligations such as groceries, car payments, credit cards, insurance, utilities, etc.
4. Credit Profile
Your latest credit score along with the total debt amount that you already owe will have an influence on how the lenders will view your application as the borrower. These factors are also used to determine the amount of money that the lenders are prepared to borrow along with the interest rate that they will charge you.
The Costs Involved In Buying A Home
If you have made the decision that you would like to own a home, you will need to be prepared to convince lenders that homeownership is suitable for you. This will mean that your credit score needs to be in good shape and that you are not struggling with too much debt and that you can prove you have a cash cushion that is sizable for the expenses you will face.
Lenders look at a number of metrics to make a decision on whether you are regarded as a risk that is suitable for a 6-figure home loan. The amount that you owe in comparison to what you are earning which the lenders call a “debt to income” ratio plays a significant role in the process of approval. This also includes the down payment. For example, if you are unable to pay the standard 20% down-payment, you might be able to obtain a loan which requires a lower upfront payment. However, you may then face higher monthly payments and an increase in the costs associated with borrowing.