Buying Your First Home: What Can You Afford?

The time has come. You have been saving up for a while now and you are finally ready to start shopping for a home. But the first question you need to ask yourself is: how much house can I afford? Read these four tips to get a better idea of what you should take into consideration before buying your first home.

Think like a Lender

There are a bunch of factors to consider when figuring out how much you can afford but one of the most important factor your lender will look at is your debt to income ratio or DTI. Don't get confused, this is a simple calculation of how much you owe versus how much you make. Add together your total monthly debt and divide it by your total monthly income. Generally, a lender is satisfied when the ratio is 36 percent (which means your debt takes up a little more than a quarter of your take home pay). Another factor is your credit score. The higher your score, the more doors will be open in regards to home financing options. A score of about 760 or higher will put you in the best shape to get a loan. The third factor is your down payment, which leads us into the next section!

How Much Have You Saved

Another very important factor to in determining how much home you can afford is your down payment. Your down payment also dictates the types of mortgage products you are eligible for and can potentially even get you a lower rate.

A conservative estimate for a down payment with a traditional mortgage is 20 percent. Don't let this intimidate you. Some lenders will accept as low as 3.5% of the total mortgage as a down payment. There are also a ton of first time home buyer programs that offer down payment assistance. In the end, it's up to you whether or not it's worth your while to save more or to act now. Remember, the larger the down payment, the more attractive you are to lenders and the less you will pay in interest over the life of the loan. On the flip side, as we all know cash is king, if you don't plan to be in the home very long, you might consider a smaller down payment.

Run Your Numbers

How much money do you have coming in and how much money do you have going out? First, take a look at your income. Add it all together and be sure to include not just your salary, but also any other fairly consistent forms of income, such as year-end bonuses, rental income, child support, or alimony. "The rule of thumb is that no more than a third of your income should go towards your mortgage," says Erin Lantz, director of Zillow Mortgage Marketplace (read more here). "It's important to set realistic expectations about what kind of home you can afford." Next, look at your expenses. Make sure you consider everything from your school loans to your credit card debt to your weekly living expenditures. Don't forget to account for those enjoyable moments in life too like nights out on the town and vacations. Running your numbers will give you a better understanding of how much money you can spend on your mortgage. Just because a lender says you can afford "x" amount doesn't mean you have to buy a home for that amount; you want to feel personally comfortable with the monthly mortgage payment.

Consider How You Want to Live

Some people will tell you to buy the most home that you can afford. There is nothing wrong with that but it is not necessarily the best strategy for everyone. "Maxing out your budget leaves you with nowhere to go if expenses rise sooner than you anticipated," Credit Sesame. Make sure to consider the unknowns when you are planning out your purchase. Property taxes and home maintenance are things to consider as well as having children or switching jobs. If your financial obligations are too high you could be severely restricted in other areas of your life. This is supposed to be an exciting time, don't cause yourself unnecessary stress living paycheck to paycheck if it can be avoided.