It
pays to check with several lenders before
you start searching for a home. Most will
be happy to roughly calculate what you
can afford and prequalify you for a loan.
The
price you can afford to pay for a home
will depend on six factors:
1. gross income
2. the amount of cash you have available
for the down payment, closing costs and
cash reserves required by the lender
3. your outstanding debts
4. your credit history
5. the type of mortgage you select
6. current interest rates
Another
number lenders use to evaluate how much
you can afford is the housing expense-to-income
ratio. It is determined by calculating
your projected monthly housing expense,
which consists of the principal and interest
payment on your new home loan, property
taxes and hazard insurance (or PITI as
it is known). If you have to pay monthly
homeowners association dues and/or private
mortgage insurance, this also will be
added to your PITI.
This
ratio should fall between 28 to 33 percent,
although some lenders will go higher under
certain circumstances. Your total debt-to-income
ratio should be in the 34 to 38 percent
range.
