Budgeting for Your Next Home Purchase

When you're planning on making your next home purchase, it's important to determine just how much you can afford to spend. Several factors go into making this calculation. Some of those factors include your monthly debts, household income, and your available money in savings. Your monthly debts include a car loan, student loan or other loan payments, for example. It is important that you are realistic in your projections when you are estimating how much your mortgage payments can be. 

You also want to be sure to plan for unexpected expenses. This is important even if you are bringing in a stable income and have a stable monthly debt load. 

You generally want to have about three months of payments in reserve. This includes your monthly debts along with your housing payment. That way, you'll definitely be able to cover your housing payment if unexpected expenses come about.

Your DTI ratio (debt to income ratio) compares your monthly debts to your monthly pretax income. If you have a really good credit score, you might be able to qualify for a mortgage with a higher DTI ratio. However, the rule of thumb is that your housing payments should not exceed 28% of your monthly pretax income. 

If your monthly mortgage payment along with insurance and taxes is $1,000, and you have a pretax monthly income of $4,000, your DTI is 25%. You can also figure out how much of a mortgage payment you can handle if you multiply your pretax income by 0.28 to stay within a 28% DTI ratio. For example, $4,000 multiplied by 0.28 equals $1,120. You could afford a mortgage of $1,120 in this case if you are trying to maintain a 28% DTI ratio.

Planning Your Housing Expense With a VA Loan

If you are attempting to qualify for a VA loan because you are connected to the military, things can be a bit different. Usually, VA loans do not require you to put down a down payment. That is because these loans are backed by the Department of Veterans Affairs. This can lead to a higher mortgage payment, but it will also allow you to get a mortgage with less money upfront.

Planning Your Housing Expense With an FHA Loan

If you are interested in an FHA loan, the good news is that it is easier to qualify for. This is great in the event you have a relatively low credit score. Usually, with conventional loans, it is assumed you will put down 20% when purchasing a house. However, with an FHA loan, you can purchase a home while putting down only 3.5%. FHA loans have special requirements. They are usually for first-time homebuyers. 

The credit score that is required for an FHA loan is usually 580 or higher. This opens up these loans for a lot of people. FHA loans can be used to buy single-family homes, multi-family homes, condominiums, mobile homes, and either two- or four-unit multi family homes.


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