How Much Can I Afford to Spend on a House?

If you are thinking of how much to spend on a house, you should account for several factors. Analyze all the relevant facts first so you can steer clear of unnecessary expenses.

Think Before Buying

This is probably the most important element. Know exactly what kind of home you can afford. Even if the bank says you can qualify for loans of $250,000, that doesn’t mean you should get one costing that much.

Those buying starter homes make this mistake often. There is no need to go for the maximum starter home loan. You need to analyze your income and finances first.

Gross and Net Income

Start to calculate how much to spend on a house by assessing your finances. Note down how much you take home. That is your net income. Your gross income is the total you make per month. However you don’t take it all as you have to pay for taxes. In addition you pay for Social Security, 401k, health insurance etc. What remains is the net income.

Facts about Front End Ratios

The front end ratio is what lenders use to assess what kind of loan you can get. The front end ratio is determined by taking a percentage of your gross monthly pay. This is what a lender uses to
check how much you can afford to pay. An FHA loan (on the average) is 31%. 33% is the rate for a conforming conventional loan.

To learn how much to spend on a house, take the following example: if your gross income (monthly) is set at $4,000, your FHA is $1,250 (maximum). For the conventional loan it is $1,300.

The Back End Ratio

This reflects your mortgage costs. Like the front end ratio it is based on monthly gross income. The FHA rate is at 43% and the conventional loan is at 45%.

When calculating your mortgage payment, always check the interest rates. In this case you should look for one with a fixed rate. Variable rates are difficult to compute as they change frequently.

With a fixed rate it is easier. Assume you get a 30 year deal with an interest rate of 6%. If you borrow $168,000, you can pay for $1,000 a month.

Other Considerations

Down payments are important when assessing how much to spend on a house. Always check if you are qualified for no down payments. There are also gift down payment offers, but these are for lower income earners.

Do some research; it takes a while, but it will pay off. The figures above are subject to change, of course. However they can serve as a guide.

You cannot skimp research on this matter. You might end up paying for a mortgage you cannot afford. The amount of down payment should also be thought about carefully. Don’t put all your savings there.

Always remember that this is your starting home. There is no need to spend a fortune on it. Set some limits on how much to spend on a house. This will allow you to save enough for your dream home later on.

Additional Reading on Home Mortgages