A general rule of thumb that says you can afford a house that costs up to two and a half times your annual income before taxes are deducted. But that is an old rule, today's lenders will usually loan over three time ones yearly income. If you are buying property with someone else, you can also consider your co-purchaser's annual income in figuring out the price range that you can afford. According to this guideline, if you and your co-purchaser have a combined income of $70,000, you should be able to purchase a home priced at $170,000 to $200,000.
That will give you a quick ballpark figure of the approximate amount you may be able to pay for a home, but your buying power ultimately on two things:
- How much you have available for a down payment
- How much a financial institution will agree to lend you
Your Down Payment
If you are a first time homebuyer, the price you can afford to pay for a house may well be limited by your ability to come up with the required down payment and closing cost. Unlike homeowners, who may rely on their equity in a property they already own, your savings are probably your principal resource. If you have not accumulated much savings, you may need to specifically set aside funds for a down payment on a regular basis from your paycheck.
Your Borrowing Power
Apart from your down payment, the other major factor limiting how much you can afford to spend on your house will be how much you can borrow. When you apply for a mortgage, the lender will primarily consider two factors in determining how large a loan to grant you:
- Your earnings and
- Your existing debt
Lender's Qualifying Guidelines
Lender's use two qualifying guidelines to determine what size mortgage you are eligible for. They are as follows:
Your monthly housing costs (including mortgage payments, property taxes and insurance, and if applicable any condo association fees.) These should total no more than 28% of your gross monthly (before taxes) income
Your monthly housing costs PLUS other long term debts should total no more than 36% of your gross monthly (before taxes) income.
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