Wanting to buy a home and being able to afford a home are two different things! Wanting to buy is easy! Many people want to buy a home, but what can they afford and how do they decide how much to spend?
One of the first things I will ask clients is how much are you comfortable with in a house payment. That makes people think about what they are spending and how much they will have available for other expenses. You want to make sure you have money left over for other expenses!
Lenders will look at your income and your debt and calculate how much you can qualify for. For some people that is more than they are comfortable with and for others it may not be! Lenders qualify you based off your debt to income (DTI). That lower that number is, the better the chance that you will keep your home! Your DTI is calcuated based on your entire house payment (including taxes, insurance, any association dues, etc) and any other debt such as car payments, credit card payments, student loans, child support, etc. Add up your debt including your house payment and divide that number by your gross monthly income. The result is your DTI.
DTI is a percentage and how high you can go depends on the program you are using. Most FHA loans will allow you to go up to 55%, depending on the overall credit, etc. Conventional loans typically cap your DTI at 45-50%, if you have less than 20% down, you will usually have a max DTI of 45%. Some programs have a limit of 41%. Jumbo mortgages (mortgages over $417,000) usually have a lower limit, sometimes as low as 38%. Before the use of computerized underwriting, the limits were usually 38% for conventional loans and 41% for FHA loans.
Just because you can qualify for a higher DTI, doesn't mean you should spend that much! The higher your DTI, the less available cash you have for savings and other expenses such as food, clothing, emergency funds, etc. Many financial advisors will suggest you spend less than 38% of your gross income to pay your monthly debt. You want to make sure that you are not "house poor"! Make sure you are comfortable with the payment so that you will be able to enjoy your home too!
Leslie Vanderwerf, NMLS ID#335509, Summit Mortgage - Email - Website
