Determining how much house you can afford is one of the most important questions to ask yourself BEFORE starting your home search. This is a common question that many first time home buyers have and often ask their Realtor and friends who are homeowners. Although income and savings are great parameters to determine home affordability, there are actually several additional factors one must consider when buying a home. For more information on first time home buyer home loans in Columbia, Lexington, Blythewood, Chapin and Sumter, as well as the whole state of South Carolina, contact me at 803 261 9267. Below are some of the factors to consider when determining home affordability:
Debt to Income Ratio
Debt to income is the total monthly debt payments divided by your gross income, commonly called the “back end” ratio. The debt payments include all monthly debts that are listed on the credit report, such as credit cards, car loans, student loans, etc. There also is a housing debt to income ratio which is your new house payment divided by your income, commonly called the “front end” ratio. The new house payment includes your principle and interest, taxes, insurance and mortgage insurance if applicable. Both of these ratios are considered when applying for a loan. When qualifying for a house, there are several loan types that are available. With each loan type, there are different debt to income guidelines but generally you want the housing debt to income ratio to be around 30% and your total debt to income ratio around 45%. To help explain this, an example is listed below:
$4000 Total Gross Income
$1200 New house payment
$600 Other monthly payments
In this scenario, the housing debt to income ratio is 30% of the total gross income and the total debt to income ratio is 45% of the gross income. This would be an acceptable and approve-able scenario for most programs. Obviously, lower ratios are preferable because no one wants to live paycheck to paycheck.
The income is one of the main figures in the debt to income ratio. It is very important to know your exact income when calculating your ratio. There are many types of income such as overtime, commission, salary, bonus, self-employment income and others. The income has to be consistent and provable for it to be allowable. Each program has different requirements, so it is best to talk with a Mortgage Lender if your scenario is a complicated one.
The credit score is a huge factor in determining which programs the home buyer will qualify for and the allowable ratios assigned to each program. It is very important to know what the credit score is before looking for houses so that the home buyer will know what programs are available and the down payment required.
Down payment will also play a role in what ratios are allowed. With some programs, a larger down payment will allow the home buyer to have higher debt to income ratios. So, it is always a great idea to save as much money as possible before buying a house. However, don’t let the lack of a down payment prevent you from starting the process. There are numerous programs that allow for no down payment.
Assets also can help the home buyer have higher debt to income ratios with some loans. So, if you have more money in bank accounts, investment accounts, 401K’s, etc, this will play a large role in the home buyers ability to get approved with higher ratios.
The loan term will also play a factor in the debt to income ratio. The longer the term, the lower the payment. Therefore, many people start with a 30 Year fixed Loan because this will offer the lowest payment and give the home buyer the lowest “front end” debt to income ratio.
Find Out How Much Home I Can Afford
Now that you have a better understanding of the different factors that play into home affordability, you are ready for a pre-approval or pre-qualification! Once we provide you with that, we can connect you with a local Realtor who can start searching for your dream home! For more information on first time home buyer loans in Columbia, Lexington, Blythewood, Chapin and Sumter, as well as the whole state of South Carolina, contact me at 803 261 9267.