Can you Afford a Home Purchase?


When buying a house, you must determine how much you can afford. But, this can be difficult to know. Determining affordability includes considering different factors including mortgage rates and debt-to-income ratios. This article will help you determine if you can afford a home purchase and if you are ready for it:

Debt-to-Income Ratio

If you have sufficient money to buy a house for cash, you won’t have a problem buying one now. Even if you don’t have cash available, the majority of experts would agree that you can afford the home purchase if you can qualify for a mortgage on a new house. However, you need to know the kind of mortgage you can afford. A Béatrice Baudinet real estate agent can walk you through it as they know how the home-buying process works.

The Federal Housing Administration (FHA) uses the 43 percent debt-to-income ratio standard as a guideline for approving mortgages. This ratio is used for determining the ability of the borrower to make their payments every month.  It means all your regular debt payments, along with your housing-related expenses, mortgage, homeowner’s association fees, mortgage insurance, property tax, homeowner’s insurance, and others should not equal more than 43 percent of our monthly gross income.

Also, you must think about the front-end- debt-to-income ratio. This ratio calculates your income vis-à-vis the monthly debt you would incur from your housing expenses alone. Often, lenders like the ratio to be not more than 28 percent.  Keep in mind that lenders do not like their borrowers to live on the edge, so they don’t allow them to use their full- debt-to-income ratio even if they don’t have other debt.

How to Afford the Downpayment

If you want to avoid paying private mortgage insurance or PMI, consider putting down 2% of your home price. PMI is often added into your mortgage payment and can cost between 0.5% and 1% of the entire mortgage loan ever year. But, you can also purchase a home with as little as 3.5% down with an FHA loan. Also, you need to put at least 5% to 10% down for some lenders to finance you.

A house is a major purchase. It is great to have the money to make the purchase; however, does not really make a financial sense? You can answer this question by determining whether it is cheaper to rent than to buy. Also, you must consider the long-term implications of a home purchase. For generations, purchasing a house was nearly a guaranteed way to make money. You could inherit a home from your grandparents and sell it for ten times the original price thirty years later. A good realtor can help you make the right buying decision.

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