How Much House Should I Afford?

Buying a home is a significant life event. Whether it’s your first step onto the property market or you’re upscaling, how much you should commit to spending needs careful consideration.

The following looks at the aspects you should consider when calculating how much you can realistically afford.

Buying A Home: Affordability vs. the Dream

• Determining your debt-to-income ratio
• What counts as debt?

Determining your debt-to-income ratio 

The very first step to working out how much you can afford to spend on a property comes by determining what’s known as your debt-to-income ratio or DTI. This is where you need to be brutally honest about the level of monthly payments you can commit to—the head should definitely rule the heart here.

The DTI is one of the crucial aspects that mortgage providers will use to determine whether you can safely afford the monthly repayments.

It’s calculated by comparing your monthly gross income against your monthly expenses. This is then converted into a percentage. The percentage number will put you into a risk category, ranging from low to unacceptably high risk. Lenders tend to categorize risk in the following manner: 

• DTI of 0-19% - very low-risk borrower
• DTI of 20-29% - good borrower
• DTI of 20-39% - acceptable risk
• DTI of 40-49% - moderate risk
• DTI of 50-74% - high risk
• DTI of 75-99% - very high risk
• DTI of 100% or higher – huge risk

The lower risk categories of up to 39% DTI is the comfortable range in which most mortgage lenders are happy to approve. As you move up further up the scale the requirements for a clean credit history and larger deposit increase. The final category of 100% DTI+ is likely to get refused by virtually every mortgage provider.

What counts as debt?

Debt can be a little difficult to calculate. It doesn’t include aspects such as utility bills, rent payments, cell phone contracts, streaming services (Amazon Prime, Netflix, and the like), etc. 

What it does encompass includes:

• Credit card/store card debt
• Overdrafts
• Vehicle finance
• Unsecured personal loans
• Student loans
• Tax arrears
• Any financial arrangements, such as alimony or financial support for children 

Once the DTI is accurately calculated, you should look at the amount you spend each month on utilities, food, transportation, entertainment, and vacations. 

The rule of thumb for housing affordability is the 28-36 rule. This means that your mortgage should account for no more than 28% of your gross monthly income, and your total debts should be no more than 36%.

Buying a Home: Finding a Suitable Lender 

• Confirm your affordability with a mortgage provider

Confirm your affordability with a mortgage provider

The figures can sometimes be a little difficult to determine. However, getting a rough idea of what you can afford will help you decide which lender/s to approach. Mortgages come in all shapes and sizes, meaning that it can be advantageous to seek the advice of a specialist advisor or service who’ll make the initial calculations before putting you in touch with the best offers.

The provider will then decide if you fall into an acceptable risk category and either approve or decline the mortgage request.

Buying a Home Now or in the Future? Maximize Potential with Advice from Capita

At Capita, estate planning, affordability, risk management, and more are at the heart of our world-leading financial services. Whether you’re considering purchasing your first property, looking for a buy-to-let mortgage, business premises, or any other type of real estate now or in the future, it pays to get the very best advice.

Good financial preparation and planning really can pay dividends, so don’t leave anything to chance.

Visit https://www.capitafinancialnetwork.com/services/estate-planning to find out more and get in touch today for a confidential and no-obligation discussion.