This is one of the first questions many people ask themselves when they begin thinking about buying a home. And if this is you, chances are there are factors that you aren’t considering as you attempt to answer this question. Yes, you may have already consider the current state of the housing market and your overall income, but what about more intricate factors like debt-to-income ratio, savings, and credit score? Ultimately, how much house you can afford is something that you’ll want to discuss with a financial adviser and mortgage professional, but here is a brief look at some of the biggest factors that will determine just how much you can afford when it comes time to buy a house.
Of course your income will be one of the first things you consider. Lenders tend to look at your income, minus your regular monthly bills (or “debts”) when determining your debt-to-income (DTI) ratio. So when thinking about income, be sure to consider not only how much money you are making but also how much of that income is already being doled out for regular expenses.
In addition to income, how much money do you have saved up that you can realistically dedicate to a down payment on a home? The more you put down for a down payment, the less you’ll need to take out on a loan. You might even see lower mortgage interest rates when you front a higher down payment.
Your credit score has a major impact on the size of the loan that you’ll be approved for. Your credit score, after all, will tell lenders how much risk they are incurring by lending you money for a new home. The higher the credit score, the more likely you are to be someone who uses a credit card responsibly and who regularly pays bills on time—very positive qualities to have as someone seeking out a home loan. A stronger credit score can make for a lower mortgage interest rate.
As has already been alluded, your DTI ratio, down payment amount, and credit score can all influence the mortgage interest rate you end up with for the duration of your loan. So, if you’re able to qualify for a lower interest rate, you are in theory better equipped to meet the expenses of a more costly home. Keep in mind here that there are many market factors that go into determining what interest rates home buyers are going to see when they are navigating the home loan process. So, in addition to your own financial circumstances, the fluctuation of interest rates has an influence on the home you can afford, as well.