Once you know that you're ready to buy a home, the next step is to determine how much house you can afford. In this video, I discuss debt to income (DTI) for the mortgage payment and the suggested debt to income for all debts combined.
Lenders use a lot of different criteria to determine if you're a good risk to bet their money on. The higher your credit, the more they'll allow you to pressure yourself, debt-wise. Your job is to make sure you're informed enough that you're not forced into a loan that causes you to be "house poor." The higher you allow your debt-to-income to go, the harder it will be for you to make your monthly payment. The most conservative experts suggest you take on no more than 25% DTI (of your gross income) when getting a loan (that's with principal, interest, taxes, and insurance combined, or PITI). Your gross income is your income BEFORE any taxes, retirement benefits, medical, dental, etc. are taken out. Experts who are less conservative in their suggestions say to go no higher than 28% DTI for your PITI payment.
If you have other debts aside from what your mortgage payment will be, experts suggest not to go higher than 36% DTI when you factor both your debts and your PITI payment combined.
Once you know how much the amount that corresponds with the DTI you feel comfortable with, you can see how much mortgage you can afford. For instance, if you have $10,000 in monthly income before taxes and other paycheck deductions, 10K x 0.25 = $2500. That number is the highest you want to have as a PITI payment. Now that you know what your maximum payment can be, you'll need a mortgage calculator to run some numbers (this is the easiest way to do it). You'll want to use the current rates at the time of your search and make sure that the calculator includes taxes and insurance in its calculator. For taxes and insurance, figure about 2% of your loan each year. If you buy a $300K home, that means you'll likely pay approx. 6K each year in taxes and insurance. If you know what your actuals are, you can obviously use those instead, but this is a good starting point if this is the first time you've bought a home.
Now you know how much home you can afford, as far as the loan is concerned. You'll now need to make sure you have enough money to cover the down payment and expenses. Subscribe to see the video on that next.