Understanding how much home you can afford is an important first step in the homebuying process. It can help you know how much your mortgage loan will be approved for and it may help influence where you buy, when you buy and what kind of home mortgage loan you apply for.
Use the Mutual of Omaha Mortgage Home Affordability Calculator to get an idea of how much you may be able to borrow for your home mortgage loan. After you crunch the numbers, if you like what you see, you can start the pre-qualification process and start the homebuying process.
Several factors are used when calculating how much house you can afford: household income, existing monthly debt payments such as school loans or car payments, and how much you have saved for your down payment.
You will also want to have a solid amount saved for emergencies - generally about three months of budgeted mortgage payments - in reserve should an expected event occur. Even if your household income and costs are relatively the same every month, emergencies can impact your ability to pay and it’s important to have additional savings set aside apart from the cash you plan to use for your purchase.
Debt-to-Income (DTI) ratio
Another important element of understanding how much home you can afford is your debt-to-income (DTI) ratio. This is calculated using your total monthly debt payments to the amount you take in before taxes.
Many lenders recommend your housing expenses shouldn’t be more than 25%-30% of your monthly income. For example, if you budget your monthly mortgage payment, with taxes and insurance, at $1,260 a month and you have a monthly income of $4,500 before taxes, your DTI is 28%. (1260 / 4500 = 0.28)
You can also flip the equation to find what your housing budget should be by multiplying your income by 0.28. In the above example, that would allow a mortgage payment of $1,260 to achieve a 28% DTI. (4500 X 0.28 = 1,260)
Loan Program or Loan Type
Your loan program will also affect how much home you can afford. If you’re a member of the armed forces, you may qualify for lower rates, lower fees, zero down payment and relaxed qualifications that can help you find a home you can afford without stretching your savings with a VA home loan.
As a first home homeowner, you may be eligible for an FHA loan, which is a government-backed home loan distributed by private lenders like Mutual of Omaha Mortgage. FHA loans often offer low down payment requirements and loan closing costs, making this loan program an attractive option for qualifying homebuyers.
How well you manage credit is reflected in your credit score and is one of the most important factors in determining your interest rate and loan approval.
Your interest rate is the percentage of your loan the lender charges a borrower for taking out a loan. Typically, the higher your credit score or the lower the term, the better the interest rate. However, many factors such as market rates, taxes and fees can all affect your interest rate as well.
When you’re ready to purchase your new home, contact a Mutual of Omaha loan specialist to get you a competitive rate. Click here to visit Mutual of Omaha Mortgage's full list of purchase loan offerings and get started today!