How to Determine the Buying Power of a Home

by Carol Deeb

Determining the buying power of a home lets you how much you can afford with your income and recurring debts. Knowing if you might qualify for the price of a home before you start looking can help you to narrow down your choices. Also, you avoid committing to a property that you can't afford. Your home buying power can change depending on the current amount of your bills. The higher your monthly debt payments, the less house you can afford.

Add all of your monthly income. Include your gross wages before taxes, investments, and any spousal support that you may receive.

Add all of your monthly debt for credit and loans, except your housing expense, such as rent or current mortgage payment. Include credit card payments, car loans and any personal loans.

Calculate your new mortgage payment. If you can keep the interest rate low, you will have more home buying power. However, if it rises, you will have to look for a less expensive home, or place more money down to keep the loan amount low enough to qualify.

Add your estimated mortgage payment into the total for your monthly debt payments.

Divide your total debt payments by your monthly income. For example, if your debt is $1,500 per month, and your income is $5,000, then you will divide $1,500 by $5,000. Your answer is 0.30, or 30 percent. This is your debt-to-income (DTI) ratio.

Make sure that your DTI is no higher than 36. Most lenders use 36 percent, including your new house payment, as a benchmark for how much home buying power you have.

Tip

  • Pay attention to the interest rates that fluctuate on your revolving debt, such as credit card payments. If you are looking to buy a house and your rates increase, this can reduce your home buying power. If this happens, you'll have to look for homes that are less expensive so you don't risk having your loan application rejected.

Warning

  • Depending on the type of loan you seek, you may be approved with a higher DTI. But keep in mind that if you have a larger percentage you may not comfortably be able to stay current on your payments. So although a bank may give you more buying power, it may not benefit you to take it.

About the Author

Carol Deeb has been an editor and writer since 1988. Her work has appeared in magazines, newspapers and online publications, as well as a book on education. Deeb is a real-estate investor and business owner with professional experience in human resources. She holds a Bachelor of Arts in English from San Diego State University.

Photo Credits

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