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# Crunching the numbers: How much home can I afford?

By Milo

July 31, 2023 4 min read

Purchasing a home is a significant milestone that many aspire to achieve. However, a lack of understanding of one's purchasing power can complicate this otherwise fulfilling journey. Knowing how much you can afford when buying a home not only streamlines the process but also empowers you to make informed decisions.

### Calculating your budget

The key factor in deciding your homebuying budget is your gross annual income before any taxes are taken out. To find your gross monthly income:

• Take your total annual pre-tax household income
• Divide it by 12

For example, if your household earns \$100,000 per year, your gross monthly income would be \$8,333 (\$100,000/12).

Next, multiply your gross monthly income by 0.45. This gives you the total maximum mortgage payment you can likely qualify for, including monthly debts. Using the example above, 0.45 x \$8,333 is \$3,750. This is the estimated maximum mortgage payment you could afford.

To find the actual amount you can devote to the mortgage:

• Subtract any monthly liabilities showing on your credit report such as car loans, personal loans, or minimum credit card payments from the initial 0.45 figure.

If you pay \$500 per month in other debts, your maximum mortgage payment would be \$3,250 (\$3,750 - \$500).

This simple calculation gives you a ballpark figure, but many other factors determine your true affordability range. Loan type, down payment, credit score, existing debt, and location also impact mortgage terms and your buying power. Work closely with a lender to analyze your unique financial profile and fine-tune your price point. Pre-qualification simplifies this process by giving you an exact mortgage amount tailored to your unique situation.

Investment Property Calculations

If you're buying a rental property or vacation home, lenders evaluate your application differently. They mainly consider the property's potential rental income rather than your current income. This analysis uses a debt-service-coverage ratio (DSCR) to confirm the property earns enough to cover the mortgage. The DSCR formula is:

• Gross Rental Income
• Minus Operating Expenses
• Divided by Proposed Monthly Mortgage Payment

The DSCR should be at least 1.0 or higher to qualify. For example, if the projected monthly rental income is \$2,000, expenses are \$500, and the proposed mortgage is \$1,500, the DSCR would be: \$2,000 - \$500 = \$1,500 \$1,500 / \$1,500 = 1.0

This meets the minimum ratio for approval. Work with an experienced lender to assess your investment property’s income potential and maximize your borrowing capacity.

### Pre-Qualification simplifies the process

Starting your home search with a pre-qualification letter in hand streamlines the entire buying journey. Milo's online pre-qualification tool is an excellent launchpad for assessing your affordability range before you start touring homes.

Our user-friendly system analyzes your financial profile and gives you a pre-approval amount along with detailed next steps. You can even adjust variables to see how factors like down payment size or property location impact your budget ceiling.

Arm yourself with critical affordability knowledge through pre-qualification. Get pre-qualified today!

The opinions expressed in the Blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product.

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