How Much House Can You Afford?

There are a lot of different “Rules of thumb” for how much house you can afford to buy. A common rule of thumb says that you should not spend any more than a maximum of 28 percent of your monthly take-home on housing. That figure includes the mortgage rate, insurance fees and taxes.

While this is a good starting point, there can be many factors which can come into play which could alter this scenario somewhat. Remember, too, that while lending institutions have certain rules that they must follow, there is also room for quite a bit of latitude from one lender to another, so a certain amount of shopping around may help you find a more liberal lender.

Interest rates are a large factor in deciding how much home you can afford. The lower the interest rate the more home you can afford, because lower rates mean lower payments. The prevailing interest rates aren’t the only factor in determining what your particular mortgage interest rate will be – your credit history and your credit score also aide in determining what the specific interest rate a lender will actually offer you. The lower your credit score the higher your interest rate is likely to be, so maintaining good credit is an important determination in deciding how much home you can afford.

The amount of your down payment can affect the way that many lenders look at you. If you are asking for a 95 percent loan – in other words, you only want to make a down payment equal to 5 percent of the price of the property – most lenders will look long and hard at you and require a great deal of security.

On the other hand, if you are willing to put up a 20 percent down payment and are only asking for the lender to finance 80 percent of the value of the property, then the lender is likely to be far more generous and far more forgiving if you don’t meet all of the strict lending guidelines. The reason for this is because if you should go into foreclosure the bank is almost certain to be able to sell the property quickly and recoup all of its investment. Since there is almost no risk for the bank, they can afford to be generous in their dealings with you.

If you are having trouble coming up with a down payment you might wish to consider an FHA mortgage loan. The FHA is the Federal Housing Administration. Their job is to help as many people as possible to get into their own homes. The FHA often has programs which allow first-time buyers to get into a home with as little as 3 percent down payment.

Your credit history, your employment history, and even your future prospects can all come into play in determining both your interest rate and, in reality, how much home you can actually afford.