How much can you afford?
What home should you choose?
Buying a home is likely the most important financial investment you will make. Once you decide to buy, you will be faced with the question of how much you can actually afford. To answer this, you must first calculate how much of a down payment you can come up with. This will play a large role in determining how much interest you pay over the lifespan of your loan and how much money the financial institution is willing to lend you. Put simply, your down payment depends on how much savings you have and are willing to put down on the home.
The process of determining how much you are eligible to borrow is a little more complex. The first step is to calculate your monthly income. After you find this number, subtract from it your fixed monthly expenses from credit cards, auto loans, and student loans. The lender will use this figure as your monthly income because it is the money available to repay a mortgage. The ideal ratio of debt-to-income is around 35%, so if you multiply your monthly income (after deducting fixed expenses) you have the monthly debt payments you qualify to make.
After determining the amount of money you can realistically pay each month, you must factor in property tax, home insurance, interest, and the length of your loan in order to get your front-end and back-end ratio. Banks rely heavily on these two debt-to-income ratios to determine how large of a mortgage you qualify for. The following links provide mortgage calculators which take the above factors into account.