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If you want to buy a home on mortgage, you need to know the amount of money you can afford. To find out this, you can take help of a home affordability calculator.
A home affordability calculator gives you an estimation of the maximum price of home and the monthly repayment amount you can afford.
Home affordability factors
How much home you can afford depends on several factors. They are:
1) Gross household income: Your household income is an important factor in determining your home affordability. The higher your income; higher will be the price of home you can afford.
2) Amount of down payment: You need to deposit at least 20% of the home price as down payment. If you are unable to do so, you will have to pay for private mortgage insurance or PMI. This insures the lender in case you are unable to repay the loan.
3) Interest rate: If you opt for a longer loan term, your interest rate will be low and the amount of your monthly payment will be less. But, in the total loan term, the amount of interest you pay will be much more, as you are making payments for more number of months.
4) Loan term: You have to choose the period over which you will repay the loan. Generally, for fixed-rate mortgage, a loan term can be of 15 or 30 years. For adjustable rate mortgage, it can be of 1-5 years. If you go for a longer loan term, the lenders may offer a bigger loan, as the amount of interest will be more.
5) Credit score: You should have a good credit report and score. Generally, a FICO score of 740 or more is considered as good. Your free credit report should not have any negative points like previous bankruptcy/foreclosure.
6) Current debts: Your total monthly debts should not exceed 36% of your gross monthly income. The debts include your car payments, personal loan, credit card payments, housing costs, etc.
So, you can calculate how much house you can afford, on the basis of the factors mentioned above, by taking help of a home affordability calculator.