One of the biggest questions when buying a home is “how much can I afford?” Once this question is answered, it’s much easier to narrow down your home shopping wish list to fit your budget. There are several factors that go into determining how much mortgage you can afford. Here are three of them.
Debt-to-income ratio or DTI: Your DTI can be calculated by adding up the mortgage payment, taxes, insurance, condo or association fees, credit card debt, auto loans, and any other debt you pay each month. That total is then divided by your gross monthly income (income before tax).
Loan-to-value ratio or LTV: Your LTV is calculated by the amount of mortgage you’re looking to borrow compared to the value or purchase price of the house. It is expressed as a percentage, so you will often hear something like “80% loan to value.” This means you’re borrowing 80% of the purchase price of the home. LTVs will vary depending on the amount of money you have to put down and will also determine what type of mortgage you will qualify for.
Credit score: Your credit score will impact the type of mortgage loan you qualify for. If you don’t know what your current credit score is, you may want to check with your loan officer or at least one of the major credit reporting agencies (Experian, Equifax or TransUnion) before you start calculating what you can afford. While many credit card companies and other lenders offer “free credit score” information, an accurate “FICO” score needs to be obtained from at least one of the major lenders when applying for a mortgage.
In Summary: There are many factors that go into what you can afford. The first step should be speaking with a loan officer. That will allow you to create an affordability plan to give you a pretty good idea of what price range you fit into and what mortgage options are available to you.
If you’re thinking of buying a new home, let us know. We are happy to share contact information for lenders we have successfully used over the years. We can also help you get started on creating a home search plan!