One of the best investments that you can make towards your own financial security and independence is purchasing a home. Buying your own home allows you to build equity and develop a sense of independence, but, for many first-time home buyers, knowing whether or not they can afford a mortgage is difficult to determine.
Buying a home is not always the right choice, but it’s a great investment if the finances make sense.
Here are three ways to help initially determine if you can afford to buy a home:
How much you can spend on a new home is directly correlated to your regular income. It seems simple enough: you can’t spend what you don’t have. The fact of the matter is that how much income you generate will influence whether or not you can afford to buy a home.
How can you determine whether or not buying a house is right for you? Budget. Running the numbers and evaluating the cash you have coming in and comparing that with your expenses will give you a good idea of whether you have the capital to invest in a new home. Don’t fret if the timing isn’t right. With a budget, you can set affordable goals and know when buying a house is right for you.
You’ve done your budget, so you know how much of your money every month goes towards your expenses. Maybe you’re operating on a tight budget month-to-month now, but you have robust cash reserves to invest in a new property. If that’s the case, buying a house might be right for you. Cash reserves will allow you to put down a larger down payment or cover closing costs. This will help lower your overall mortgage and make monthly payments more affordable.
Debt and Expenses
Armed with a budget and a better understanding of your cash reserves, we can evaluate your debt-to-income ratio (DTI) and determine how much you can really spend each month on a new home. Your DTI is determined by dividing your monthly debt payments by your monthly gross income. For example, if you bring in $3,000 every month and have debt payments equal to $600, your DTI would be 20%.
$600 (Your Monthly Debt Payments) / $3,000 (Your Gross Monthly Income) = 20% (Your DTI)
Knowing your DTI is helpful because, as a rule of thumb, your total home-related costs shouldn’t exceed 28% of your monthly income. Taking that further, your total debt payments shouldn’t be greater than 36% of what you bring in every month. If you can add a mortgage to your monthly debts and stay under those benchmarks, buying a new home might be right for you.
At First Lenders, we’re committed to helping you make the financial decisions that are right for you. Give us a call to discuss your home mortgage options!