What can a Buyer Afford?

Even before starting to look at houses, find out what price house or condominium you can afford. Roughly speaking, you can afford to buy a home equal in price to three times your gross annual income. More precisely, the price you can afford to pay for a home will depend on six factors:

  1. Your 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

Lenders also analyze your income in relation to your projected cost of home ownership and outstanding debts to determine the size loan you can have. Your housing expense-to-income ratio 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. The sum of these costs is referred to as "PITI".

Monthly homeowner association dues, if you're purchasing a condominium or townhouse, and private mortgage insurance are added to the PITI. Your housing expense-to-income ratio should fall in the 28 to 33 percent range, although some lenders will go higher under certain circumstances. Your total debt-to-income ratio should be in the 34 to 38 percent range.

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