How Much Home Can You Really Afford?

How Much Home Can You Really Afford?

Most people take for granted how much home they can afford.  If the real estate agent or mortgage professional tells you that you can get up to a $300,000 home, do you argue?  Most times not.  Most people don't question it.  But you should understand it and make sure you don't get in over your head in mortgage payments.

There are several factors: credit score, total assets and what's known as your "debt-to-income" ratio (DTI). Your DTI is extremely important, yet most people have never heard of it. In simple terms, DTI is your total "minimum" monthly debt payments divided by your gross monthly income. Here's a good rule of thumb: the lower your DTI, the better.

What is "minimum monthly debt?" It's the amount you are required to pay on a monthly basis, like your car payment, student loans and credit card payments. If you pay more than the minimum amount on your credit cards, this does not count against your DTI, since only the minimum amount you're required to pay is included in the total.

Keep in mind that minimum monthly debt simply means the minimum you have to pay each month. Even if you owe $5,000 on a high interest credit card, if your minimum monthly payment on that card is $100, that is what goes into figuring your DTI. But be careful. Only paying minimums can actually make some debts grow larger.

Go over all your expenses and debts with your mortgage professional when buying a home. Make sure you understand how your home affordability is calculated. By planning properly, you'll be in the best financial shape to make sure your dream home doesn't turn into a nightmare.

If you have any questions about this article (or any other we've posted here), please leave us your comment.