How Much House Can I Afford?
How Much House Can I Afford?
Jason Lee May 21, 2021 The Simple Dollar
To understand how much house you can afford, you need to take into account two important factors — what lenders will approve you for and what fits within your budget. The good news is that these budgetary guidelines typically line up. Even so, you will need to make sure you don’t take on more house than you can afford just because the lender is willing to approve a loan for that amount.
How much home can I afford?
Lenders look at a long list of criteria to determine the amount of house they’re willing to approve you for. The list includes things like your current monthly debt payments, your total debt, your income, your credit score, your current assets, how much of a down payment you can make and the current status of the economy.
1. The 5 Cs of lending
According to Wells Fargo, lender approval can be summarized as the five Cs — credit history, capacity, collateral, capital and conditions.
Credit history is your credit score and your past borrowing history can be found in your credit report. Capacity refers to what you can afford. Often, this is a look at your debt-to-income ratio — how much you are paying in debt monthly versus how much income you are bringing in.
Collateral in a home purchase will be the physical home you are buying, which becomes collateral the bank or lender can seize when you don’t repay your loan. Capital deals with what other assets you might have to help with repayment of the loan, and conditions are the purpose of the loan, the market environment and the status of the economy.
2. The rule of 20
A rule that may be somewhat antiquated — but is still widely cited as important — is the rule of 20. According to this rule, homebuyers should not purchase a home unless they are prepared to make a 20% down payment on top of the additional costs associated with purchasing the home. For example, if you are looking to buy a $300,000 home, under this rule, you should be prepared to make a down payment of $60,000.
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