Calculating How Much Home You Can Afford

May 29, 2021 • Our Blog
Calculating How Much Home You Can Afford

If you are looking to buy a home, it is essential to understand how much you can afford. This blog post is going to teach you the basics of how lenders assess your home affordability.


1. What Is A Mortgage?

Before finding out how much of a mortgage you can qualify for, it is essential to understand what a mortgage is!

A mortgage is essentially a loan secured by the property. Lenders can lend you up to 100% of the appraised value on your home (depending on the loan program), if you enough funds to close and can afford the monthly payments.

This allows most Americans to buy homes, as most do have thousands of dollars lying around in savings. It also is one of the few debts that is tied to an asset that appreciates.


2. LTV (Loan To Value)

A mortgage loan-to-value ratio, or LTV, is the percentage of a property's value that you can afford to borrow as your new mortgage. In other words, it is dividing the mortgage amount by the appraised value of the property.

For example, if you are borrowing $224,000 to buy a house that is worth $250,000, then your LTV would be 80%.

Diamond Residential Mortgage will follow the loan program's guidelines when determining the maximum LTV ratio.


3. DTI (Debt To Income)

Another ratio that your lender will use to determine your home affordability is your DTI (Debt-to-income) ratio. The DTI ratio tells lenders how much of their monthly income will go towards paying off debt. This is calculated by adding up your monthly debt payments (housing, cars, loans, credit cards, etc.) and dividing it by your total monthly income.
For example, if your monthly debt, including housing, is $1,700 and your monthly income is $4,500, then your DTI ratio will be 37.78%.


4. Monthly Payment

The final way in which lenders determine your home affordability is your comfortable monthly mortgage payment. You, as the borrower, will calculate this number as it will depend on your lifestyle.

Do you enjoy eating out or taking vacations? Do you give back to a charitable organization monthly? Ensuring that you have extra cash flow is key to maintaining your current lifestyle without overextending yourself.

To get started on determining your home affordability and find out if it's in range for you financially, click here!