Before you start house hunting, there’s a big question to answer: what’s your budget? Ultimately, only you can decide how much debt you’re comfortable with and are willing to take on. It’s a big decision, and only you can make it.
First, how much will you put down? If you’re not sure, consider your loan-to-value (LTV) ratio. It’s the portion of a home’s price tag that you’ll need financing to cover after making a down payment. Let’s say you have your eye on a home worth $335,500. You can put down $16,775, so you’ll need to borrow $318,725 to cover the rest. Your LTV ratio would be 95% ($318,725 ÷ $335,500) because the loan you need will cover 95 percent of the home’s worth.
How does this help? Well, your LTV ratio impacts which loan types you can apply for and what your rate and monthly payment will be. Plus, a LTV ratio above 80% means you’ll need to pay extra for mortgage insurance every month. Knowing the financial impact of your choices can help you decide what to put down with confidence.
What’s your debt load? Consider your debt-to-income ratio (DTI). To calculate, take the amount you pay each month in recurring debts divided by your overall monthly income. With some exceptions, DTIs need to be 43% or lower.
What’s your monthly savings? To calculate your monthly discretionary income, subtract any regular payments you make each month from your total monthly income.
What’s your budget for a monthly payment? Add up your average monthly spending across bills, necessities, and typical day-to-day expenses (bank records will help here), and then subtract them from your total monthly income to see a realistic budget for what you have to work with.
