Here is now to calculate how much home you can afford to purchase.
Figuring out how much to spend on a house is like trying to find the perfect porridge temperature, except instead of three bowls, you have a sea of houses to choose from. But no need to fret! As your local mortgage professional, we can guide you through the quest for homeownership. So let’s get started.
How to Use DTI to Calculate Home Affordability
First things first, let’s talk about Debt-to-Income Ratio (DTI). DTI helps us mortgage professionals determine how much house you can afford. Think of it as a comparison between the money you earn and the money you spend. We’re talking about your recurring expenses like housing costs, car payments, student loans, and credit card debt. After crunching the numbers, we’ll get a DTI percentage.
Here’s what that might look like. Let’s say you earn $2,000 a month, and your monthly debts add up to $600. Divide $600 by $2,000, multiply by 100, and we’ve got a DTI of 30%. Not bad!
Most lenders prefer a DTI ratio of around 43% or lower to qualify for a conventional mortgage.
But how does DTI translate into the overall cost of your dream home? Let’s assume a 6% interest rate on a 30-year fixed-rate mortgage, which would mean that your monthly principal and interest payments will be around $650 for every $100,000 borrowed.
So now let’s divide your DTI (30%) of your monthly income by $650, and multiply by $100,000.
($600/$650) x $100,000 = $92,307
Congratulations, you’ve just estimated your maximum mortgage amount!
Add your planned down payment (let’s say $10,000), and you know roughly how much home you can afford to buy.
So using our example, $10,000 down plus $92,307, your total home purchase price would be $102,307.
Now, keep in mind that this calculation is just a sneak peek. It doesn’t include other expenses or debts. You’ll also want to consider those. Plus, items like child support, downpayment assistance programs, and the current mortgage rate increase your buying power.
Where to Find Accurate Answers –Fast!
Remember, it’s best to consult a mortgage professional for the most accurate calculations and to help you navigate this intricate process with expertise. Use this scenario to get an estimate, but we also encourage you to use our online calculator and contact us for an obligation-free consultation. Then, you’ll be on your way to finding a home that’s not too hot, not too cold, but just right.
