How to assess your finances and calculate your price range for purchasing a home
Buying a home is a huge financial undertaking. Many get caught up in the excitement of the possibility, while others see it as an unattainable task. When you are thinking of buying a home or planning for it in the future you must assess your finances and consider affordability to begin your home search journey.
Here are three tips when you are trying to identify how much you can afford when looking for a house:
1. What is your debt-to-income ratio?
When you apply for a mortgage, your mortgage lender will assess a variety of financial factors but primarily they will evaluate your debt-to-income ratio. This is something that you can also consider before going to a lender.
It is calculated by adding up all your monthly debts, for example, rent and house payments, car payments, monthly credit card payments and any other monthly recurring debts. This doesn’t include costs such as taxes, groceries or utility bills.
This final figure is then divided by your monthly gross income. For example, if your monthly debts are TT$3,000 and your gross income is TT$8,000 per month then your DTI ratio is 37.5%.
If your DTI ratio is 50% or less this will put you in a better position to have more mortgage options.
2. What is your monthly budget?
Once you know your DTI ratio and the debts you have, you need to then think about your monthly budget moving forward. Create a spreadsheet and keep track of your incomes, expenses and savings over a specific period of time, for example, 3-6 months.
When you see your finances in front of you evaluate where your mortgage payments will fit in. This will help you estimate how much you can afford monthly and it will also assist in reorganising your budget to save towards your down payment if necessary.
This is a great practice for your general financial well-being but it is particularly beneficial when you need to plan out your savings towards a certain goal.
3. Other Mortgage Factors
Your mortgage and monthly payments will be determined by many factors and in particular these three:
- The Mortgage Term: the length of time you have to pay back the money you have borrowed
- The Interest Rate: this can be determined by your down payment, housing market conditions and more.
- Your down payment: a larger down payment can reduce your interest rate and even the length of your loan.
While you can’t determine this on your own you can go to your financial institution or lender and ask for a loan estimate, even if you can’t take the mortgage right away you can have a number to work with when planning your finances to buy your future home.
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