One of the most important numbers in your home search is not the asking price of any particular house. It is your own comfortable price range. Set it too high and you may feel stretched every month. Set it too low and you might miss homes that would have worked well. Here is how to find the sweet spot.
Lenders focus heavily on your debt-to-income ratio, often called DTI. To figure it, add up your monthly debt payments, including the estimated new mortgage payment with taxes and insurance, plus car loans, student loans, minimum credit card payments and other obligations. Then divide by your gross monthly income, meaning income before taxes.
Each loan program has its own DTI guidelines, and other factors like credit score, savings and down payment also play a role. A loan officer can tell you how your numbers fit the programs you are considering.
Here is an important point: the maximum amount a lender approves is a ceiling, not a target. DTI uses gross income, but you live on take-home pay. It also does not account for child care, groceries, travel, retirement savings or other goals. Your comfortable payment might be lower than your approved amount, and that is perfectly fine.
Start with what you bring home each month after taxes and deductions. Then list your regular expenses and savings goals. What is left over is the realistic space you have for housing. Make sure your housing number includes more than principal and interest:
Our mortgage calculator lets you plug in different prices, down payments and rates to see how your monthly payment changes.
A larger down payment means a smaller loan and lower monthly payment, which expands the price range you can comfortably handle. But you do not necessarily need 20% down. Eligible buyers may put down as little as 3% on a conventional loan, 3.5% on an FHA loan with a 580 or higher credit score, or $0 on a VA loan with full entitlement. Explore low down payment options to see what may fit. Just be sure to keep some savings in reserve after closing.
Once you have a rough budget, a pre-approval turns estimates into something more concrete. A loan officer reviews your credit, income, assets and debts and tells you how much you may qualify for and under which programs. You get a clear picture of your options, and sellers see that you are a serious buyer.
Use the pre-approval and your own budget together. If the approved amount is higher than your comfort zone, shop based on your comfort zone. Many homeowners who bought below their maximum say the extra breathing room made owning far more enjoyable.
Finding the right price range is the foundation of a successful home purchase. Reach out to FLO Mortgage and a loan officer will help you build a budget and pre-approval that fit your life.
A FLO Mortgage loan officer can walk through your options, run real numbers and help you choose a loan that fits.
This article is for general education and is not a commitment to lend. All loans are subject to credit approval, underwriting guidelines and program availability. FLO Mortgage, Company NMLS #1835856. Equal Housing Opportunity.
© FLO Mortgage, LLC. All rights reserved. Company NMLS #1835856.