Despite what you may have seen on HGTV’s House Hunters, not everyone can afford a million-dollar home. So how exactly do you determine how much you can afford, and more importantly, how much you are comfortable with spending on a home?

Here are a few things to consider as you set your home-buying budget.

  1. Look at your debt-to-income ratio, also known as DTI. Lenders use this number to get a basic idea of how much home you can afford. It compares your recurring monthly installment and revolving debt payments to your gross monthly income. While not a hard-and-fast rule, lenders broadly follow the 30/43 ratio. This means that up to 30 percent of your income can go toward your mortgage payment and the other 13 percent can go toward other monthly debts and expenses, such as car loans, credit cards and student loans.

    Example: If your gross monthly income is $6,000, 43 percent of that would amount to approximately $2,600 in monthly expenses. If you were to have a $1,600 mortgage payment, you’d then be left with $1,000 for your remaining monthly debt expenses.

    You’ll also want to factor in additional monthly expenses, such as groceries, utilities, gas and spending money. Don’t forget about these expenses when trying to determine how much you can afford for your monthly mortgage payment. These expenses are not directly included in your DTI, but factored into the ratio your lender uses.

  2. Evaluate mortgage programs. Depending on the type of mortgage program you choose, you may be limited on the percentage of your income your payment can be. Certain programs have strict guidelines to follow, which may limit the purchase price of your home.

  3. Shop around for rates. The amount of home you can afford to buy will also depend greatly on the mortgage rate you receive. Your credit score and down payment can be a factor in determining your rate. Be sure to shop around and make sure you’re evaluating not only the rate, but any upfront costs, such as points, which may be associated with the rate you receive.

  4. Get pre-approved. The best way to know how much you truly can afford is to get a pre-approval before you start looking for a home. Talk with your lender to determine what type of loan is best for you and what a comfortable payment looks like.

To get a quick idea of how much you can afford, visit our “How Much Can I Afford” calculator.

For more questions about getting started, or to get pre-approved, contact an APGFCU home loan specialist at 888-Loan-391.

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