3 Things that can help you determine how much home you can afford 

When you decide to buy a house for the first time in your life, then you should determine ‘how much house can I afford’ so that you don’t loose your cherished house to foreclosure. Before taking a home loan, you should evaluate your personal finances and preferences in order to determine the size of the mortgage loan you can afford to borrow. 

Things to determine how much house you can afford

Here are the few things that can help you to determine how much house you can afford 

1. Front-end ratio: The first thing that you should consider before taking a home loan is the housing ratio/ front-end ratio. It is the total housing expenses divided by your gross monthly income. The 4 basic components of housing expenses consist of principal, interest, property tax and insurance. You are required to keep the housing ratio within 28%.  

2. Back-end ratio: Your debt-to-income ratio or back-end ratio is the percentage of your gross monthly income that will go towards your debt expenses. Your debt expenses will include credit card payments, mortgage, car payments, student loans, and etc. Your total debt payments should be around 36% of your pre-tax monthly income.  

3. PMI: You have to buy private mortgage insurance or PMI on making less than 20% down payment on the purchase price of the house. The purpose of the PMI is to protect mortgage lender against potential loss in the event of loan default. So figure out if you have saved that amount of money. If you have not saved that amount of cash, you will be required to take PMI and your monthly house expenses will increase. This will let you know ‘how much house can I afford’ in actuality. If you can’t make at least 20% down payment, then these are the things that you can do:  

a) Federal government mortgage-financing programs: The federal government offers home loan programs to the first-time homebuyers. These programs necessitate small or no down payment. 

b) Borrow against the value of your investments. Some financial organizations offer home loans against the value of your investments. In these programs your investment portfolio acts as the collateral for your home loan. 

c) Borrow from your retirement plan: Most of the employers let you borrow against the value of your 401(k) plan. You can borrow money from that account. 

Finally, another thing that can help you determine ‘how much house can I afford’ is the Homeowner’s Association Fees. Calculate whether you have sufficient money to pay the fee.