Home ownership is part of the American dream. We all want to have a space to call our own, but in order to avoid disappointment and ensure that we’re on the right path, we have to ask ourselves one vital question: “How much home can I afford?”
Answering that question is easier than you think.
How Much Home Can You Afford?
Before you shop around trying to find the best rates on a mortgage, you need to know how you’ll make the financial side work. In order to figure out what you can afford, you need to look at your situation like a lender.
Your Debt-to-Income Ratio
Lenders look at your debt-to-income ratio to determine whether you will be able to pay your mortgage payments and keep up with your current obligations. They’ll look at your existing debts, including:
- Credit cards
- Car loans
- Student loans
- Personal loans
For the most part, your debt-to-income ratio shouldn’t exceed 36 percent—and that includes your new mortgage. That number is calculated by dividing your monthly debt by your monthly gross income.