Home Loans: How Much Can I Afford?

Before you start shopping for home loans, you should figure out how much you can afford. Consider your debt to income ratio, credit rating, and monthly expenses.

Your debt to income ratio is the percentage of your total monthly salary that is spent on repaying credit cards and other debts, such as auto loans or student loans. Income includes any interest, support, tips, or commissions you receive besides your regular paycheck. When it comes to qualifying for most home loans, having less than 40% of your income set aside for debt repayment is ideal. If you multiply your annual salary by three, that is the maximum amount that you are likely to afford, according to most experts.

You may want to consolidate credit card debt in order to increase your affordability. Consult a financial planner about the impact this move will have on your credit score. Your credit score will play a role in your ability to afford payments on home loans. The higher your credit score, the better chance you will have at a low fixed rate mortgage.

Monthly mortgage payments include the principal loan payments, the interest, property taxes and home insurance. Using an online mortgage calculator can help you add up all of these costs to determine how much of a monthly payment you can afford. The initial costs of originating your mortgage must also be considered. You may already have some money set aside for a down payment, but you should save money closing costs, too.