Ways to Determine Your Home Affordability

Buying your first home is as exciting a process as it gets. But, it’s not just about finding the features or the neighborhood that you want. For majority of the people, the price of a home is a major deciding factor. Basically, there are two ways to determine whether you can afford a particular home on your current salary or not.

1.      The monthly housing cost as a percentage of your gross income

The rule of thumb says that your monthly housing costs must not exceed 28% of your total gross income. For example, if your annual salary is $50,000, your monthly take home income will be $4,167. If we follow the above mentioned rule, you can afford to spend $1,167 per month on housing costs. The housing costs, here, will include payment of mortgage installments (principal + interest), real estate taxes and homeowners’ insurance.

This is the most straightforward method of calculating your affordability. However, majority of the times there are various other factors involved in addition to just housing costs when you calculate your affordability.  Such factors can be student debts, car payments, credit card debts etc. This is where the next method of calculating home affordability comes in.

2.       Debt to income ratio

The debt to income ratio method evaluates your home affordability by considering other debt repayments in addition to the housing costs. The preferred ratio says that your entire debt payments must not exceed 36% of your income.

This method paints a more accurate picture of your home affordability. For example, On a yearly salary of $50,000, or on a monthly salary of $4,167, you have the following debt obligations:

·         Student Loan of $200

·         Car payment of $400

·         Credit card payments of $100

Now, if your housing costs amount to an additional $1000, the total comes out to be $1,700 and ideally your entire debt can’t exceed $1,501. This means affording a home that costs above $800 will be a problem for you.

Now that the basics are clear to you, you can check out All Western Mortgage’s home affordability calculator to figure out how much home you can afford. You can check out our mortgage amortization calculator here.