Buying your own home is perhaps one of the most important transactions of your life. It can either save or cost you a lot of money. Every little aspect is to be given special attention to ensure this transaction proves out to be an investment that was worth it. Starting off in this procedure, you first set a target budget that you will bring forward to buy your own house. Now the question is calculating the right amount that you should be capable of paying. How do you overcome this starter checkpoint? Well, a home affordability calculator is the answer you’re looking for. This article has brought you everything you need to know about figuring out your budget to afford your own house.
What is a Home Affordability Calculator?
Starting with the basics, a home affordability calculator is, as the name suggests, a tool to compare your income and budget for buying a house. To be able to afford a house of a certain price, your income should be of a specific value. It calculates the amount of money you need to be earning in order to bring forth a certain target value for house affordability. This is the basic definition of a home affordability calculator. This calculation involves several factors. While the majority of your earnings and expenses are stable, there is likely to be an unexpected spike in either expenses or costs every once in a while. But don't worry. The general rule of home affordability calculation takes care of that. So, how exactly does it work? Let us take a look at the basic rules of calculating home affordability prices.
How Does it Work?
To calculate the approximate value of a house, you should be able to afford; the house affordability calculator takes certain factors into account. These include your household income, expenditures, monthly debts such as student loans, etc. As a home buyer, you should be left with enough amount to settle into your new house without worrying about the coming month’s expenses. Your mortgage, of course, plays a major role in this calculation. The average percentage of your mortgage should take out of your monthly income is around 25%. This comparison is done when your pre-tax monthly income is compared with your monthly liabilities (not household expenses). Let us look into an example. Suppose your monthly mortgage debt is $1,500. Taxes and insurance are included. Furthermore, your monthly pre-tax income is $4,000. Therefore, your debt-to-income ratio (DTI) would be 1500/4000=0.26 (26%). This calculation almost fits our criteria of a 25% mortgage payment out of the monthly income.
Home Affordability Calculator FHA
Let us suppose a scenario in which your best bet is a conventional loan in a 25% down payment. But if you’re considering a much lower percentage of down payment, then an FHA loan is best for you. A Federal Housing Administration (FHA) loan is a loan that comes from an FHA approved lender. These loans are designed for the lower-middle class that is less likely to afford a heavy down payment. Moreover, this loan is suitable for people with lower credit scores. If you’re tight on budget, you can borrow up to 90% of a house’s value through an FHA loan. This will leave you with a down payment of around only 3%. However, to obtain an FHA loan, your credit score should be at least 580. If these criteria cannot be met, then you’ll have to fall a bit shorter with the down payment. An FHA loan is most widely preferred by first time home buyers and the low/middle class.
Home Affordability Calculator VA Loan
If you’ve been involved with the military, a VA loan just might your cup of tea in buying a house. So, what exactly is a VA loan? A Veterans Affairs loan is a mortgage-backed up by the US government for ex-military personnel. A VA loan can do wonders for you since it does not require a down payment at all. However, only licensed US veterans or widowed spouses are eligible to apply for the VA loan. The VA loan guarantees that the government will repay the debtor's debt if they fail to make payments. This support takes out the element of risk for lenders lending money to borrowers. The best part of this loan is that no down payment gets into the frame. So, if you're an army veteran of the US, your home affordability calculation can easily be backed up by the government itself.
The 28/36 Rule in Home Affordability Calculation
The most common yet best practice in home affordability calculation is the application of the 28/36 rule. This rule determines how much of a mortgage the house buyer is eligible to pay monthly. As we mentioned above, the average mortgage deducted from your monthly income should not go more than 25-30%, 28% to be specific. Whereas other debts such as student or car loans should not go further than 36% of your pre-tax income. Lenders use the 28/36 rule to analyze this ratio of mortgage and payment. Some lenders also enable borrowers with higher credit scores to have higher DTI ratios. The 28/36 rule is optimal for calculating your home affordability, but you will still need to bring other factors to this calculation for more accurate results.
Factors You Need to Consider
Home affordability calculation requires some mainstream factors to be taken into account. The following are based on a general perspective. If you have other such aspects that may impact your research in housing affordability, be sure to discuss them with your financial advisor.
- Monthly Income
Your monthly income is one of the most important factors in the calculation of house affordability. The more stable it is, the more precise the outcome. If your monthly income changes every month, calculate a yearly average to determine a fixed amount. Your income establishes the very base of your housing budget calculation.
- Cash Reserves
Savings and liquid assets that you own are the second most important factor that plays a part in house affordability calculation. You’ll have to use your savings and reserves to bring forth an accurate overview while using a home affordability calculator.
- Debts and Liabilities
Your monthly debts, household expenses such as groceries, bills, insurance all fall under the category of liabilities. This amount should be stable too. While unexpected expenses may occur, you should still have a fixed amount set separately for your monthly expenses.
- Credit Score
Lastly, your credit score is what determines your presentation as a borrower in front of the lender. This score will value the amount of money you’re capable of owing the lender.
Home Loan Calculator Affordability
The amount of loan you will be provided from your lender will require them to ask certain questions. These will be answered through your debt-to-income ratio DTI, your history of paying debts in time, evidence of stable income, down payment, and other relevant finances. If you pass this test, the lender will consider you to be a worthy borrower. Your credit score will determine your mortgage rate further on, as well as the interest charges. But do remember that lenders do not take your side values into account. Only your current outstanding debts are of interest to them. Other miscellaneous liabilities will not be included in the consideration.
Conclusion
As we mentioned earlier, buying your own home is an important decision. Ensure you’re taking care of legal obligations in this procedure. Furthermore, the best home affordability calculator can easily be accessed through the internet. The affordability calculation depends on the factors of your situation. Try different calculators and different scenarios to understand the background of this process. We hope all of your questions regarding home affordability were answered clearly in this article. Good luck getting your dream house!
