There are many ways to calculate how much home you can afford to buy on your annual income. In all the various suggestions, a key lesson is to make your home purchase decision carefully. Nickle City Funding in Orchard Park, NY has compiled various theories on how to determine the value of home you can afford. However, for expert advice, you should check with a professional. Each person’s situation is unique.
Calculating How Much Home You Can Afford with Your Annual Income
Many differing opinions exist on how to calculate what home price you can afford. Some suggest multiplying your annual income by 2.5 or 3 to see. However, there is no set ideal amount, since many factors determine the ultimate cost of the home. These include the interest rates you are able to finance, any repairs needed, costs to finance the home or put a down payment, and more. Some banks suggest using 1.5 times your income and others suggest 5 times.
Costs to Purchase a Home
When analyzing how much home you can afford on your annual income, it is important to factor in the up-front costs with purchasing the home. This is also known as the housing-to-expense income ratio or the front-end ratio. This is usually calculated by subtracting the monthly mortgage, insurance, taxes, and any home cost from your monthly income. Some suggest that this should be less than 28%.
How Much Debt Do You Already Have?
You cannot just factor in your income alone when calculating whether you can afford to purchase a home. You must also look at how much debt you already have owed against your worth. Many suggest that this ratio should be less than 36% and definitely no more than 46%. Remember that once you take on a mortgage, each month you will need to pay that as well as any outstanding debt owed to credit cards, student loans, auto loans, etc.
How Much Debt Will You Need to Finance?
Some argue that you should pay as much cash as you can when purchasing a home. This may be unrealistic to some. When looking at how much home you can afford, you should determine what type of mortgage you would be able to secure. Think about how much the interest rate, closing costs, insurance, and other fees will be associated. These charges can add up quickly, so it is helpful to pay cash and earn equity in the home quickly if you can afford to.
Nickel City Funding Inc. in Orchard Park, NY can help you look further at home prices in the area and discuss your home ownership goals. Please do not hesitate to reach out with any questions.