So, you want to know just how much house you can afford? Whether this is your first home purchase or your 5th, many people want to know just how much house they can afford. Well, that depends! If you are planning to borrow funds from a bank, you need to think like a bank. After all, it's the bank that will really own your home, and of course the bank wants to protect THEIR investment. Most banks will look at your Debt to Income ratio to calculate how much house you can afford. This DTI ratio is a simple calculation. It compares your TOTAL monthly debts (mortgage payment, car payment, etc) to your monthly gross income. And generally speaking, most banks say your monthly debt expenses should be less than 36% of your monthly income. So, let's say your gross income is $5,000 each month and you are currently renting. Your lease is up for renewal in 2 months, and you are thinking about purchasing your first home. You have a monthly car payment of $600 and no other debts (yay for no credit card debt)! So, your monthly mortgage payment (this includes taxes and insurance) can't exceed $1,585 each month. You are currently renting for $1,300 each month, so you might as well go buy a home, right? Well....maybe! There are still some other things to consider...like a down payment! Most types of loans require 3.5% to 5% down payment. Reach out to a local lender and see what option is best for you! And if you do have some smaller debts, like small loans or credit cards, consider paying them off first before you reach out to a lender. Paying them off can lower your DTI and help you qualify for a larger loan. Oh, and did I mention credit score? Well, of course, credit score matters! So, be sure to always pay on time! Never make a payment late on any line of credit!
So, back to our scenario above of the mortgage payment for $1,585. Remember, that includes your property taxes and home insurance, which most lenders will collect with your principal and interest. Let's assume you are looking for a home for sale in Madison, MS. The average home price in Madison is $385,000. Think you can afford it? Let's dive a little deeper in that. Using a simple loan calculator, plug in $385,000 on a 30 year loan at 3.5%, the principal and interest is $1,728. So, you will know in this low inventory market that you will be looking at homes below the median price where the competition is fierce! This is why is so important to reach out to a lender before you start home shopping! So, now you've gotten pre approved with a lender who said you can spend up to $300,000. You are excited to have that piece of paper, and now you can really start shopping! When we are in a sellers market (to put it simply there are more buyers currently than sellers) this is measured by the local absorption rate (this compares how many homes sold in the last few months to how many homes are currently on the market) you know that you have to be a little aggressive to get that house you want! You might even make a few offers and lose out to higher bidders. That's ok! Keep trying! Make sure you're working with the best real estate agent that knows how to get an offer accepted! And having a little extra cash in this market helps! So start saving! Under this current scenario, if you wait 3 years, you would've spent nearly $47,000 on rent! Chew on that for a minute!
Ultimately it's the bank that will decide how much to lend you and there are many factors! DTI and credit history are the main factors, but every bank is different. So, if you think you are ready to purchase a home, get a good lender and a good real estate agent on your side!
If you’re thinking of moving to Mississippi, be sure and check out our website www.taylorgroupms.com, it has all MLS listings in Central MS and is updated every 10 minutes. Whether you're buying or selling, our team is here to help every step of the way. Contact us today to get started.
Taylor Realty Group
601-613-9100
