For most people, a lot of brainpower goes into buying a home—especially if it’s your first. So it’s tempting to go in search of an easy, clear-cut “rule of thumb” that tells you what you can afford, like a price-to-income guideline.

This may have worked in the past (when many assumed you could afford a house worth two times your gross annual income), but things today are a little different.

Research from the American Enterprise Institute’s Center on Housing Markets and Finance shows that, “When it comes to ease of buying your first home, it’s not how much you make, but where you buy.” The report goes on to say that first time buyers in both Houston and Portland might have similar median incomes, but “buyers in Portland paid 52 percent more than in Houston. On a price per square foot basis the median [first time buyers] in Portland paid twice as much as the median [first time buyers] in Houston ($207/sq. ft. versus $100/sq. ft.).  

So if there’s no simple rule of thumb to use, how do you know how much you should spend?

Keep your Debt to Income (DTI) ratio in mind

Your debt to income ratio is specific to you and your finances. Most lenders determine the maximum payment you can qualify for based on your DTI, also known as the percentage you get when dividing your monthly liabilities (such as student or auto loans and credit card debt) by your gross monthly income.

For example, a $72,000 annual salary equates to $6,000 per month before taxes. If you have $1,080 per month of liabilities, your DTI without a house payment is 18 percent ($1,080/ $6,000). If your lender has a maximum DTI of 43 percent, you would have approximately 25 percent, or about $1500, of your net income still available for a mortgage payment (remember to include taxes and insurance). Once you know your maximum mortgage payment, you’ll have to look at what fits your budget and go from there.

Use your financing options

The good news is that, compared to previous decades, there are generous financing options available for first time home owners. For instance, FHA loans offer low minimum down payments at 3.5 percent. VA loans, available to members of the military, National Guard, eligible surviving spouses, veterans and reservists, do not require a down payment and could come with special benefits and optimal terms to eligible borrowers.

When you’re ready to buy a house, the best first step is knowing your options, and that’s what Open Mortgage loan originators are there for. For more help to find out about loans and pre-qualification, contact us today.

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