How to determine if you can afford to buy a home

Buying a home is one of the biggest purchases and most important milestones in most people’s lives. But before rushing into it, you should determine whether you can afford to buy a home.

First, Make Sure You Have a Down Payment to Buy a Home

If you are looking to buy a home, the first step is making sure you have enough money to afford to make a down payment. In general, it is advised to have enough saved up to make a down payment of 20%. This allows you to avoid paying for private mortgage insurance (PMI), which adds to your mortgage payments every month.

Do the Percentages Math on Debt and Mortgage Payments

Another thing to consider when buying a home is how much of your income is being spent on your mortgage and debt. To determine if you can afford a mortgage, you can follow the 28/36 rule. This rule states that you should spend no more than 28% of your gross monthly income on a mortgage and no more than 36% on your total debt.

Your debt-to-income (DTI) ratio is typically used to determine whether you will be approved for a mortgage or not. You should aim to have a DTI of around 36%, as anything over 43% will likely keep you from being approved. To calculate your DTI, add up all your monthly debt payments and divide that by your gross monthly income. If your DTI is too high, you may want to reduce debt or wait until you start earning more before trying to buy a home.

Make Sure You Will Still Have Some Cash Left Over

The affordability of a home will also depend on how much your savings will be impacted if you choose to purchase it. Make sure that you have some cash left over after paying the down payment in case of the (likely) unexpected expenses that will pop up. Depleting your emergency funds to pay for a home is never a good idea and is a possible indicator that you can’t afford it right now.

The key basis for determining if you can afford a home is your mortgage rate. Your mortgage rate will depend on several factors, such as your credit score, down payment amount, and DTI ratio. Lenders take all these factors into account when determining your mortgage rate. Therefore, if you want to make sure your profile is in good shape to get the lowest possible mortgage rate. This often means paying down as much debt as you can before you try to buy.

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