How Much Home Can You Really Afford

You've probably heard that your credit score is all-important when looking to buy a home. While it's true that your credit score will affect your loan, there are other factors to look into when shopping for a home loan.

Take a few minutes to ask yourself the three questions below. They will help prepare you for finding and getting the best loan - one that is realistic about how much home you can really afford.

1. How Much Down Payment Can You Afford?
   A larger down payment will open up more loan possibilities for you including conventional fixed-rate loans, adjustable rate loans, Veteran's Administration (VA) loans, Federal Housing Administration (FHA) loans, and buy downs. In addition to your down payment, a lender likes to see additional assets as a "backup" -- proof that not all of your money is tied up in the loan.
2. Where Will You Get the Money?
   Ideally, you get the down payment from your savings account. When lenders see a good savings history, they are more willing to give you a loan with good terms. Technically, you could also use money from friends, family or your 401k for a down payment, but lenders could put stricter guidelines on the loan.
3. What is Your Debt-to-Income Ratio?
   The debt to income ratio (DTI) is a number that tells how much money you can afford to pay for your housing costs every month. The first number of the ratio (the front ratio) is the percentage of your income before taxes used to pay housing costs. These costs include the principal, interest, taxes, insurance and any homeowners' association fees. The second number (the back ratio) is the front ratio number plus any other consumer debt including car payments, credit card debt and personal loans. It does not include monthly bills such as utilities or medical insurance.

The guideline ratio for most lenders is 33/38, which means that the cost for housing is 33% of the monthly income while the cost for housing plus the other consumer debt is 38% of the total monthly income. These guideline numbers can change with your credit score and down payment amount. There are various free DTI calculators online.

As you begin your search for a new home, having a realistic sense of how much money you can use as down payment plus the maximum you can afford per month for your housing costs will save you from disappointment. Use tools such as RateMarketplace.com's online Mortgage Payment Calculator [LINK to http://www.ratemarketplace.com/mortgage/calculators/mortgage-payment-calculator.html] for a better idea of what your monthly costs will be with a variety of loans. After all, that mansion on the bay with the pool and hot tub may look good on paper, but it could be as cold as ice if you don't have enough money to pay the heating and utility bills.

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