How Much House Can you Purchase?

Wondering how much home you can realistically purchase before you head out to start shopping? It can be a little tricky; especially if you’re not sure which type of loan program you may utilize. This is because even though you may have a ballpark idea of how much your budget can afford to stretch for a monthly mortgage payment, what you think you can afford and what you may be eligible to purchase according to the guidelines of various mortgage programs could be completely different.

Under traditional guidelines, the rules stipulated that you shouldn’t spend more than 25% of your monthly gross income on housing expenses; including insurance, taxes, homeowners’ frees and the actual mortgage payment itself. Today things are somewhat different and a lot of that difference can depend on the type of mortgage program for which you are applying and the health of your credit score.

Lenders look at it this way: if your credit report and score are in good shape, it’s more likely you can handle a larger mortgage payment. You’ve already demonstrated with past purchase that you are financially responsible and they’re willing to risk that you’ll continue on that same path in the future. On the other hand, if your credit report has some problems, they are less likely to take that same risk and more likely to regard your loan application in a more conservative fashion.

So, while someone with excellent credit is more likely to be able to be approved for up to 28% of their gross monthly income on housing expenses a homebuyer with a spotty credit record may only be approved for 25% of their gross monthly income. Okay, you might think. So, that’s a difference of 3%. That’s not that much. Depending on your gross monthly income it could actually make a rather large difference in how much home you can be approved to purchase. Let’s say your monthly income is $4,500. While an approval for 28% would allow you to spend $1260 a month only housing expenses, an approval of 25% would only allow you to spend $1125 a month on housing expenses. This could mean a $20,000 difference in what you can afford to offer on a home. With everything taken into consideration that could cost you an extra bedroom, the home office you want or the house with the pool in the backyard.

So, before you start shopping around be sure you know exactly how much your loan program will allow for housing expenses. They aren’t all the same and it really does make a difference.

 
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