If you are an individual considering purchasing your first home, one of the most important items to consider is how much mortgage you can afford. Knowing how much you can spend on housing expenses will determine the price range of homes that you should be looking at. Items that will affect the mortgage amount are your income, your down payment amount, and the additional housing expenses associated with each specific home.
Additional Housing Expenses
When you purchase a home, there are additional housing expenses to consider. There may be real estate taxes, homeowners insurance and possible homeowner association fees. Homes in one city or county may be higher or lower compared to a neighboring location.
Insurance coverage costs can vary depending on location and extent of coverage. For instance, if you purchase a home in southern Florida, flood and windstorm (hurricane) insurance coverage is required. If you purchase a home in a different state, it may not be required.
If the home you are interested in is located in a planned unit development (PUD), chances are that there is a homeowners association for the community, with monthly fees.
Income
When applying for a mortgage, the debt to income ratio is one factor taken into consideration. A lender will examine the potential total housing expenses as described above and compare that to the amount of monthly income you earn. Ideally, if you spend around one third of your income on housing expenses, that is an acceptable amount. If you are closer to fifty percent, then you may be stretching your finances and may not be able to afford that mortgage amount. Another factor that affects the mortgage amount is the down payment.
Down Payment
The down payment amount will change the mortgage amount that is needed. If you put down a higher amount, then you would need a smaller mortgage amount for the rest of the purchase price. If you have little funds to put down, then you would need to obtain a larger mortgage to afford that same home.
Lack of funds does not mean that you cannot apply for a mortgage. A down payment could be borrowed from a relative. Or, another option is to look for a mortgage loan program specially designed for first time homebuyers. This type of mortgage allows for a smaller down payment amount than the conventional mortgage loan.
Once you have determined approximately how much of a mortgage you can afford, you may find that you are able to afford more than you originally expected. On the other hand, you may discover that you have to look at smaller homes if what you desire is out of your affordability range.