Finding Your Affordable price range

Your house will likely be your biggest purchase, so figuring out how much you can afford is the one of the first major steps in the homebuying process. The good news is coming up with a smart home budget is pretty straightforward and not too time-consuming.

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How To get the best interest rate

Credit Score Rate

It’s a good idea to get your credit in order before you apply for a mortgage.

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Debt-to-income ratio

Your debt-to-income ratio, or DTI, compares your monthly income to your monthly debt.

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Down Payment

Bigger down payments can mean better mortgage rates and less lender risk.

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Your DTI Rating

First add up your total monthly debt and divide it by your gross monthly income.

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Very helpful fully explaining the different plans. Cash value is accessed via policy loans, which accrue interest and reduce cash value our valuable items.

Maria Marlin Retired Govt Officer, ON, Canada
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Very helpful fully explaining the different plans. Cash value is accessed via policy loans, which accrue interest and reduce cash value our valuable items.

Maria Marlin Retired Govt Officer, ON, Canada
  1. Begin your budget by figuring out how much you (and your partner or co-buyer, if applicable) earn each month. Include all revenue streams, from alimony and investment profits to rental earnings.

  2. Next, list housing costs and your total down payment. Include annual property tax, homeowner’s insurance costs, estimated mortgage interest rate and the loan terms (or how long you want to pay off your mortgage). The popular choice is 30 years, but some people opt for shorter loans.

  3. Lastly, tally up your expenses. This is all the money that goes out on a monthly basis. Be accurate about how much you spend, as this will dictate what you can reasonably afford.

Maxing out your income to buy your dream house is a one-way ticket to financial trouble. It’s important to make sure you have enough room in your budget for emergencies and unexpected expenses, not to mention retirement savings.

To determine how much house you can afford, most financial advisers agree that people should spend no more than 28 percent of their gross monthly income on housing expenses and no more than 36 percent on total debt -- that includes housing as well as things like student loans, car expenses, and credit card payments. The 28/36 percent rule is the tried-and-true home affordability rule that establishes a baseline for what you can afford to pay every month.

It’s a good idea to get your credit in order before you apply for a mortgage. First, check your credit report at one of the big three agencies, Equifax, Experian, and TransUnion. You can get one free copy per agency per year (go to annualcreditreport.com). Carefully review your report and note any incorrect information as well as negative marks.

If you find mistakes on your report, be sure to alert the credit reporting agency immediately. Be aware, you might have to prove that the claims are wrong by providing payment history or other evidence. If it’s a case of identity fraud, then you will have to file a fraud report with your local police department.

Like most reverse mortgages, you must be able to keep the home in good repair and pay property tax and insurance payments. The principal and interest are due when the home is sold, or when the borrower dies.

Funds can be received in the following formats:

  • Equal monthly payments for the rest of your life
  • Equal monthly payment for an agreed period
  • A line of credit, though there are caps on the size of some lump-sum withdrawals

Your debt-to-income ratio, or DTI, compares your monthly income to your monthly debt. People with high debt relative to their income will have a higher DTI and vice versa. This is an important number because it shows borrowers your bandwidth to assume more debt. The higher your DTI, the harder it will be to get a mortgage, much less a good interest rate. Many lenders won’t consider a borrower with a DTI above 43 percent.

For borrowers, it’s a good idea to pay off as much existing debt as possible to qualify for a mortgage as well as to make room for a mortgage payment. By paying off debt, you’ll be in a better position to manage your monthly costs and open up resources in case you run into emergency expenses.

Monthly expenses are not counted in your DTI, only debt obligations. So you don’t have to include things utilities, gym memberships or health insurance.

Bigger down payments can mean better mortgage rates because lenders are risking less money. The loan-to-value ratio, or LTV, takes into account your down payment. The bigger the down payment, the lower the LTV and the less risk the lender will assume.

If you don’t have a large down payment, but are ready to buy you can always refinance into a lower rate later, provided market conditions are favorable. If you decide to go this route, get your finances and credit score in tip-top shape now so you have a better shot at refinancing into a lower rate sooner. The faster you can lock in a lower rate the faster you’ll be able to shave off money from your monthly mortgage payments.

Of course, it’s not always easy or practical to save up a large down payment. There are many first-time homebuyer, government and needs-based down-payment assistance programs available for buyers with no or low down payments. Be sure to check with your local government or talk to your lender about programs you are eligible for.

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