PHH Home Loans, LLC Blog

How Much House Can I Afford?

December 3rd, 2016

couple-african-american-couple-looking-at-home-from-back-smaller"How much house can I afford?" - how to find the answer

That question may be in the top-five, most-heard questions from prospective homebuyers. The best answer is, "Only you know how much house you can afford" - that means honestly assessing your entire financial picture and not just determining how much money you have for the down payment and all of the fees, but for all of the expenses that come with owning a home.

Here are some tips on how you can you prepare for the mortgage financing journey that ends at the front door.

Know the "magic numbers"

Assets and income form the essential elements of the equation a lender will use to determine your loan worthiness. But there are the other important numbers that will be factored into the final decision.

Credit score
The strength or weakness of your credit score will help to determine if you can qualify for a mortgage and then how much and what kind of loan. A high score tells a lender that you are capable of taking on a greater level of debt and they can feel comfortable approving you for an equally greater-size loan. Conversely, a lower credit score will reduce the lender's confidence and the amount of the loan for which you can qualify.

Debt-to-income ratio
The debt-to-income ratio is relatively easy to arrive at, but another very important number for you to know: it is the cost of all of your monthly debts divided by their gross income. So, if your monthly debts are $2000 and you make $5000, then your ratio is 40%. Unlike the credit score, you should aim for a lower ratio - the higher it is, the more a lender is going to question your ability to repay the loan. To qualify for a conventional loan, the debt-to-income threshold is 38%, while an FHA loan allows for a slightly higher ratio of 43% - which would make the buyer in the previous example better suited for an FHA.

"Reality check"
This isn't an established number like the credit score or debt-to-income ratio. A credit score only takes into account reported debt obligations, like car payments and credit cards. The "reality check" is based on your self-evaluation of all of your monthly financial obligations in a nutshell - energy bills, train tickets for commuting, cable television, etc. After all of those outflows are accounted for, you must assess if you can realistically "cash" that "reality check" each month, along with a mortgage, drawing against what you have in the bank. And it's just not about today: you need to ask yourself hard questions like, "If I lost my job tomorrow or got sick and had to go on disability, could I still afford my monthly debts?"

Adding it up

Many websites, like Zillow and Bankrate, let you "stress test" your numbers using an affordability calculator. Some ask for as little information as annual income, total monthly debts, estimated down payment and interest rate to give you a ballpark figure for how much house you can afford. While not an exact number, it can help temper or alter your mortgage expectations - sometimes in a positive direction.

First steps - next steps

Once you are confident that you know your numbers, it's time to talk with a trusted Loan Officer who can help guide you to the mortgage solution that best fits your needs and assist you throughout the entire loan process, from approval to closing. Together, you can ensure that you will take the best step: into a new home.

PHH Home Loans, LLC

PHH Home Loans, LLC, 1 Mortgage Way, 3rd Floor, Mt. Laurel, NJ 08054. NMLS ID # 4256. ( Massachusetts Licensed Lender #MC4256; Licensed by the New Hampshire Banking Department; Rhode Island Licensed Lender. Equal Housing Lender.

PHH Home Loans, LLC d/b/a Coldwell Banker Home Loans.  1 Mortgage Way, 3rd Floor, Mt. Laurel, NJ 08054. NMLS ID #4256. ( Alaska Licensed Mortgage Lender #AK4256-2, 866-462-8266; Arizona Residential Mortgage Licensee #BK 0907285; Licensed by the Department of Business Oversight under the California Residential Mortgage Lending Act; Licensed by the Delaware State Bank Commissioner  #8094; Georgia Residential Mortgage Licensee #20292; Illinois Residential Mortgage Licensee #MB.6759857; 100 W. Randolph, 9th floor, Chicago, IL 60601, 800-532-8785; Massachusetts Licensed Lender and Mortgage Broker #MC4256; Minnesota – This is not an offer to enter an interest rate lock-in agreement; Montana Licensed Mortgage Lender #4256; Licensed by the New Hampshire Banking Department; Licensed by the New Jersey Department of Banking and Insurance; Licensed Mortgage Banker – NYS Banking Department; Ohio Certificate of Registration  MB. 804019; Rhode Island Licensed Lender. Equal Housing Lender.