Estimating how much home you can afford to buy will require some calculation on your part. However, knowing your budget beforehand will save you looking at properties you cannot afford. The main things to take into account are:
- Your income left over after your expenses
- Savings needs for retirement or college tuition
- Your down payment
- Taxes and insurance costs
- Mortgage details such as interest rate and term
- Front end and back end ratios
- Closing costs
Most moneylenders recommend a debt-to-income ratio of no more than 36%; this means you should not count on putting aside more than 36% of your income to cover debts. The housing-to-income ratio should fall somewhere between 28 and 33%.
Generally speaking, if you have few debts and have the 20% down payment, you should be able to afford a house whose value is three times your annual income. For this reason, married couples who can combine their incomes are at an advantage to a single person earning an average salary of about $35,000. The problem of finding affordable housing is less if you are single but earn an above-average salary. Your bank will be able to give you more expert advice on what you can really afford based on your income and lifestyle.
One way to afford a slightly more expensive home than you can technically afford is to get something with rental value – an extra room you can rent out, a duplex apartment or a garage apartment. The rental income you maker can go towards the payments on the loan, and you will end up with a better investment in the end.
Another way to make payments more affordable is to take out a 30-year loan instead of a 15-year loan. Although you will have a longer commitment with the bank and pay more interest in the long run, your monthly payments will be lower because they will be spread over a longer period. The bank will also be willing to lend you more money than with a shorter term loan.
Choosing the area where you will live can also mean your money stretches further. Property prices in California, for instance, are higher on average than those in a state like Kansas.