With the Nashville housing market once again in full swing and rental rates on the rise, you may be considering taking the plunge into home ownership, but how do you determine how much home you can afford? When planning a home purchase there are many factors to consider, such as your housing ratio, total debt obligation ratio, amount you have for a down payment, current interest rates, and so on. Let’s examine these factors, so you can rest assured with your home budget.
Housing Ratio
The housing ratio is simply the percentage of your monthly income that will need to go to all of the housing expenses associated with your new home. In addition to the mortgage, there are many hidden costs, such as insurance, utilities, maintenance, and repairs, associated with homeownership. Therefore, it’s important to establish a budget for these housing expenses prior to moving into your new home.
Mortgage lenders typically grant home loans to those who have a housing ratio of 30 percent or less of their gross monthly income. To determine this, simply multiply your gross monthly income by .30. For example, if you make $4,500 a month before taxes, you will be able to afford a monthly mortgage payment of $1,350.
Total Debt Obligation Ratio
The total debt obligation ratio includes the percentage of your gross monthly income that goes towards all of your monthly debt payments, including credit cards, car payments, and so on. According to financial experts, your total monthly debt should not exceed 36 percent of your income. You can begin preparing for home ownership by paying off your credit card balances and car loan as soon as possible in order to be at or below the 36 percent threshold.
Down Payment Percentage
Prior to the housing crisis, lenders were handing out loans left and right to Nashville residents with only a five percent down payment. Today, however, most lenders are asking that homebuyers have a 20 percent down payment in order to secure financing. Thus, you should be saving as much as you can so you will be able to put the 20 percent down that is required by many of today’s mortgage lenders.
Additional Factors to Consider
There other factors that may affect how much home you can afford. For instance, in addition to affecting whether or not you qualify for a mortgage, your credit history and score will also affect your mortgage rate. Speaking of mortgage rates, the current mortgage rate or the rate you qualify for will also affect your monthly mortgage payment. Financial experts state that every one percent interest rate increase leads to an 11 percent drop in purchasing power. Lastly, fees and closing costs must also be taken into consideration.
Plan for the Future
As you can see, there are many factors to consider when determining your ability to afford being a Nashville homeowner. If you want to take advantage of rising home prices, or if you are planning on raising a family, then it is never too early to begin planning for the future. A little sacrifice now will pay off greatly in the future.
Everyone may dream of being a homeowner, but the truth is, home ownership isn’t right for everyone’s financial situation. By earning a high credit score, paying off your debts, achieving a high enough gross income to afford the right home, and saving for a 20 percent down payment, you will be able to secure the right home for you. If you feel you are ready to enjoy the benefits of home ownership, click here to see what homes you can afford.
