How Much House Can I Afford?

If you are looking to buy a house, you have probably asked yourself this question: How much house can I afford?  Looking at your financial situation and weighing if you have the financial capacity to buy a home can give you a general idea, but if you want to have a rough figure about your affordability on buying a house, here’s how you can determine how much house you can afford.

Finding How Much House Can I Afford?

Mortgage lenders calculate your affordability to buy a home based on your personal information, income, debt expenses, and size of down payment. They will look at your budget, how much mortgage payment you can afford, and other factors such as taxes, insurance, and other expenses are also considered. Usually, lenders do not want you to have monthly payments exceeding more than 28 to 44 percent of your monthly income.

To aid in determining how much house you can afford, mortgage calculator proves to be a handy tool in determining housing affordability. For your convenience, here is a spreadsheet that will help you calculate how much house you can afford.

This How Much House Can I Afford Spreadsheet will help you estimate your affordability on buying a home.

Factors Included in Calculating How Much House Can I Afford

Front-end ratio

The standard rule is that your monthly housing expenses should not take up more than 28 percent of your income before taxes. To calculate your housing costs, add up your expected housing expenses (monthly mortgage payment, real estate taxes, insurances, HOA dues, etc) and divide it by how much you earn each month before taxes. For example, if your total expenses amount to $1200 and your monthly gross income is $5000, your ratio is 24 percent.

Back-end ratio

As a general rule, your total debt, including your mortgage, credit cards, car loans, medical expenses, and other debt obligations should not exceed 36 percent of your monthly gross. To determine the percentage of your debt, add up all your debts and divide it by your gross monthly income. For example, if you have total debt obligation of $1,800 and your monthly gross income is $5000, your ratio is 36 percent. Most lenders require a debt-to-income or back-end ratio of no more than 36 percent.

Property Taxes

The average effective property tax rate in South Carolina is just 0.57 percent. Homeowners of South Carolina real estate pay annual property taxes based on the assessed value of their property and on their local tax rate. Please call the Tax Collector’s office in the city where you plan to buy the home for more information.

Homeowners Insurance

Depending on your specific policy, homeowners insurance covers the dwelling, personal property, personal liability, etc. The annual cost of homeowners insurance is often estimated as a percentage of the property value, averaging about 0.4 percent. For example, assuming you are buying a 200,000 home your estimated monthly homeowners insurance is $67.

Private Mortgage Insurance

If your downpayment is less than 20 percent, the lender will require you a Private Mortgage Insurance (PMI). This type of insurance protects the lender against loss in the event you default on your loan. PMI allows you to make a smaller down payment on a home but can cost you an extra 0.3 to 1.5 percent of the original loan amount per year. For example, for a $120,000 loan, assuming the PMI fee is 1 percent. You’ll be paying $1,200 per year or $100 per month on top of your mortgage.

After you finished entering your data on this spreadsheet, you can see your affordable house price. Use this tool as your rough reference only. It is best to consult with people in the financial institution to assess how much house you can afford based on your financial situation. If you have any questions, please do not hesitate to reach us.

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