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How Do You Calculate How Much House You Can Afford?

How Do You Calculate How Much House You Can Afford?

Buying a home is a significant financial commitment, and determining how much house you can afford is a crucial first step in the home-buying process. Several factors come into play, including your income, debts, down payment, and the interest rate on your mortgage. Here’s a comprehensive guide to help you calculate how much house you can afford.

Step 1: Evaluate Your Income and Expenses

Start by examining your monthly income and expenses. Calculate your gross monthly income, including all income sources before taxes. Next, list your monthly expenses, such as utilities, groceries, transportation, insurance, and existing debt payments like credit cards, student loans, and car loans. This will give you a clear picture of your financial health and help you understand how much money you have available for a mortgage payment.

Step 2: Use the 28/36 Rule

Lenders use the 28/36 rule as a standard guideline. According to this rule, you should spend 28% of your gross monthly income on housing expenses and 36% on total debt payments, including your mortgage, credit cards, and other loans.

For example, if your gross monthly income is $6,000:

  • Maximum housing expenses (28%): $6,000 x 0.28 = $1,680
  • Maximum total debt payments (36%): $6,000 x 0.36 = $2,160

If you have existing debt payments totaling $500 per month, your maximum affordable mortgage payment would be:

  • $2,160 – $500 = $1,660

Step 3: Calculate Your Down Payment

The down payment is the money you pay upfront when purchasing a home. It affects your mortgage loan amount and monthly payments. A higher down payment can lower your monthly payments and qualify you for a better interest rate.

Standard down payment percentages range from 3% to 20% of the home’s purchase price. For a $300,000 home:

  • 3% down payment: $300,000 x 0.03 = $9,000
  • 20% down payment: $300,000 x 0.20 = $60,000

Step 4: Consider Other Costs

Owning a home comes with additional costs beyond the mortgage payment. These include property taxes, homeowner’s insurance, private mortgage insurance (PMI) if your down payment is less than 20%, maintenance, and utilities. Make sure to factor these into your budget to get a realistic view of what you can afford.

Step 5: Use Online Calculators

Several online mortgage calculators can help you estimate how much house you can afford. Input your income, expenses, down payment, loan term, and interest rate to estimate your monthly mortgage payment and home price range.

Step 6: Get Pre-Approved for a Mortgage

Getting pre-approved for a mortgage is a crucial step in the home-buying process. It clearly explains how much a lender will loan you based on your financial situation. This will help you set a realistic budget and show sellers you are a serious buyer.

Step 7: Maintain Financial Stability

Maintain financial stability before and during the home-buying process. Avoid making large purchases or opening new credit accounts, as these can affect your credit score and loan approval.

Conclusion

Calculating how much house you can afford involves evaluating your income, expenses, down payment, and other costs associated with homeownership. By following these steps and using tools like the 28/36 rule and online calculators, you can establish a realistic budget and confidently move forward in the home-buying process. Remember to get pre-approved for a mortgage to solidify your budget and enhance your buying power.

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Affiliated Business Arrangement Disclosure Statement
This is to give you notice that Sonic Loans Inc., Sonic Title Agency LLC, and Sonic Realty LLC have a business relationship. The nature of the relationship between the Referring Party and the provider(s), including percentage of ownership interest, if applicable, is: Sonic Loans Inc., Sonic Title Agency LLC, and Sonic Realty LLC are all 100% owned by the same party. Because of this relationship, this referral may provide any of the above parties with financial or other benefit.
A. Set forth below is the estimated charge or range of charges for the settlement services listed. You are NOT required to use the listed provider(s) as a condition for settlement of your loan on, or purchase, sale, or refinance of, the subject property.
THERE ARE FREQUENTLY OTHER SETTLEMENT SERVICE PROVIDERS AVAILABLE WITH SIMILAR SERVICES. YOU ARE FREE TO SHOP AROUND TO DETERMINE THAT YOU ARE RECEIVING THE BEST SERVICES AND THE BEST RATE FOR THESE SERVICES.
Provider and Settlement ServiceCharge or Range of Charges
Sonic Realty LLC1%-6% of purchase price
Sonic Title Agency, LLC Title Insurance Policy: $950 - $1706 on a $250,000 property. (Rates vary and are dependent on the state, selling price, and loan amount on the property.)
Title Search Fee: $250 - $325 (where applicable)
Closing Fee: $450 - $650
Sonic Loans Inc.

This company provides various real estate mortgage loan origination activities either as a third-party originator or a mortgage broker, including loan pre-qualification, competitive bid process (when providing third-party origination services), loan origination, loan pre-approval, loan structuring, processing, and closing.

Loan Origination Charge: 0-3 % of loan amount (may include 3rd party fees)
Loan Discount Fee/points: 0.5%-6% of loan amount.
Application/Processing Fee: $0.00 - $875.00
Flood and tax service: $0.00 - $95.00
Underwriting Fee: $0.00 - $1295.00
Document Review Fee: $0.00 - $400.00
Appraisal Fee: $0.00 - $850.00
Credit Report Fee: $0.00 - $135.00

Actual charges may vary according to the particular lender selected, the particular services provided, and the underlying transaction, borrower selections, etc. Some or all of these fees may be charged by third parties and/or the Member Mortgage Lender/Mortgage Broker. The Member Lenders and Mortgage Brokers have agreed to pay a fee ranging from 0.5% to 2.75% of the loan amount to Sonic Loans in connection with a range of loan origination services provided by Sonic Loans to the Member Lender/Mortgage Broker. The fees are paid either directly to Sonic Loans by the Member Lender/Mortgage Broker or billed directly to you at closing.
B. Set forth below is the estimated charge or range of charges for the settlement services of an attorney, credit reportingagency, or real estate appraiser that we, as your lender, will require you to use, as a condition of your loan on this property, to represent our interests in the transaction.
Sonic Loans Inc. provides mortgage lender/broker services. Sonic Realty LLC provides real estate brokerage services. Sonic Title Agency LLC provides title insurance and settlement services.

Provider and Settlement ServiceCharge or Range of Charges
Appraisal Fee$0-$800
Credit Report Fee$63-$125
 Actual charges may vary depending on the lender and loan program selected which can be found on your loan estimate.
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I/we have read this disclosure form and understand that Sonic Loans Inc., Sonic Realty, LLC, or Sonic Title Agency LLC are referring me/us to purchase the above-described settlement service(s) and may receive a financial or other benefit as the result of this referral.