How Much House Can I Afford
Whether you’re a first-time Lease-to-Own buyer looking for the perfect starter house or a seasoned pro trading up to your waterfront dream home, you are probably asking the same question: Can I afford this?
To get a more accurate picture of which house you can afford, you should analyze three things: your income (and potentially the co-borrower’s income), your budget and your savings.
Income Questions to Ask Yourself
- Do you have job security?
- Do you work in a commission-based job? Are you confident that
your commission structure and monthly income are stable?
- Do you expect your incomes to increase or at least stay the
- Will an on-property ‘roommate’ help offset financial burden and
add to income picture?
- Are you expecting or planning to have a child in the near
future? Do you know if your salaries and budget will change once the baby is
- What is your Debt-to-Income?
The Debt-to-Income (DTI) ratio is a personal finance measure that compares an individual’s monthly debt payment to his or her monthly gross income. The debt-to-income ratio is the percentage of your gross monthly income that goes to paying your monthly debt payments.
While Lease2OwnAmerica™ does use a form of Debt-to-Income (DTI) to assist in underwriting, best practices use some of the following assumptions:
- Debt-to-income ratio less than 36%. Carrying healthy debt.
- Debt-to-income ratio between 37% and 42%. Debt load acceptable, but not perfect
- Debt-to-income ratio between 43% and 49%. May be on the verge of financial distress
- Debt-to-income ratio more than 50%. Likely have too much debt and need to find ways to reduce debt
Your Monthly Budget
It’s important to know how much you earn but how much you spend per month. Even with favorable lease-to-own rates, the total outlay of monthly expenses should be accounted for in total budget.
You should outline how you currently spend on the following categories: housing and home maintenance, auto and transportation, kids, education, entertainment, bills and utilities, food and dining, gifts and donations, tithing, health and fitness, personal care, pets, shopping, taxes, travel and other miscellaneous monthly expenses.
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Of course you will probably have to consider other factors such as the average cost of living in your area, median house prices and your immediate need for more or different housing space.
You will likely need a significant sum of money for your first Lease Option or sometimes called Down Payment (often 5% of the property’s Purchase Price).
In order to enter into a Lease-to-Own program, you will need to have enough money saved (or borrowed) for the necessary Application Fee (typically $35 to $50), the first Lease Option and the first month’s Lease Payment.
It is important to not completely raid your savings when you Lease-to-Own or purchase a new house. It is always advised to expect the unexpected on a path to Home Ownership. In general, you should budget 1 to 3 percent for unexpected events like major vehicle repairs, personal injury, family matters or a small economic crisis.
To help examine your savings capacity and determining much house you can afford, consider using a Real Estate Monthly Budget and Planning Worksheet like this one offered by Framework:
Once you’ve determined how much you can afford, you can shop for a Lease-to-Own property at View Homes.