Buying a home can be an exciting time in life. There are many things to consider; how many bedrooms, how many bathrooms, the neighborhood and the school district. However, perhaps the most important consideration is how much home you can afford. The general rule of thumb is that most homeowners can afford a home loan that is 2 to 2.5 times their gross income. This means that a family with a household income of $100,000 could probably afford a house of $200,000 to $250,000. Of course, this is a generalization. There are other factors to take into account.
When lenders are considering potential buyers, they look at more than just your gross income. They also take a close look at the buyer’s initial and final proportions, as well as the amount of down payment they can afford. We will take a closer look at what these factors are and why they are important.
1. Introductory Rate – The introductory rate is the percentage of gross income that will go toward the monthly mortgage payment. The mortgage consists of principal, interest, taxes and insurance. Most lenders don’t want to see an initial ratio higher than 28%. This means that the mortgage payment must not exceed 28% of the monthly income.
2. Back-end ratio: The back-end ratio is the percentage of gross income that is required to cover debts. This includes the mortgage, credit card payments, child support, and the like. Most mortgage companies would like to keep this ratio below 36% of gross receipts.
3. Down Payment – Lenders would like to see a down payment of at least 20%. A down payment of this amount will allow the buyer to avoid paying for expensive mortgage insurance.
Buying a house can be a very satisfying experience. It is a lifelong dream for many and a great achievement. However, it can also be expensive, so the total financial situation must be considered. One must not only consider income, but also expenses, debts, lifestyle, and personality. Only after these things are carefully and thoroughly considered is one ready to buy a home.