If you are looking to buy your first home, one of the first questions you need to ask yourself is how much house can I afford to buy? It's easy to get carried away looking at your dream house, but first, you need to take a look at your finances. You need to consider if you can keep up with your mortgage repayments, even if your circumstances change. Before you take the next step in your home-owner journey, consider the following points.

Front End Debt To Income Ratio

The best place to start is your gross monthly income. Gross monthly income is your earnings before tax and deductions. The front end debt to income ratio is the percentage of your gross monthly income you would be paying towards your housing costs (mortgage payment, insurance, etc.). Lenders use this ratio as one method of assessing buyer affordability. An FHA loan requires a front-end DTI ratio of 31 percent, while a conventional mortgage requires a front-end DTI ratio of 28 percent.

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Back End Debt To Income Ratio

Also used by lenders, this calculation includes how much of your income is currently paying off existing monthly debt payments such as personal loans, car finance, etc. It is calculated by adding the monthly mortgage payment to the sum of your existing debt payments and dividing by your gross monthly income. An FHA loan requires a back-end DTI ratio of 43 percent, while a conventional mortgage requires a back-end DTI ratio of 36 percent. Some lenders are more flexible if you have a good credit history.

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Down Payment

You should aim to have a 20 percent down payment. However, some lenders will accept as little as 3.5 percent. Having a larger down payment will allow you to borrow more money and buy a bigger home. Furthermore, a bigger down payment helps to keep your monthly mortgage payments down. It's important to remember that you don't want to leave yourself completely penniless. If you are a buying a home that needs work you will need to keep money aside to accommodate this.

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Loan Term

The standard loan term is 30 years. Longer loan terms will lower the monthly payments. However, you would be paying more interest. You can choose to repay your loan over a shorter period if you wish. This would increase the monthly payments, but you would pay less interest overall. For some people, they prefer the financial freedom of being mortgage free earlier in life.

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Credit History

Your credit history is data relating to any previous or current debts such as credit cards, loans, and finance. It shows any missed or late payments. Lenders will check your credit history as part of their assessment. You can check your credit history online before applying for a mortgage. It's important to keep up to date with repayments to protect your credit score.

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Interest Rates

The home you can afford is greatly affected by the interest rate of your mortgage. Lenders will offer you an interest rate based on your affordability checks and credit history. So if you have a low debt to income ratio, a good credit history and a 20 percent down payment you're likely to be offered a lower interest rate. This can increase the amount you can borrow by a substantial amount.

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Closing Costs

It's important not to forget the closing costs incurred at the end of the sale. These would usually include attorney fees, title search, escrow deposit, mortgage application fees, recording fees, and surveys. Your closing costs are typically estimated in advance. Some sellers offer to pay the closing fees as part of the deal.

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Personal Finances

Managing your finances will keep you ahead of the game when it comes to home buying and home owning. There are several options available online that allow you to keep track of your finances on Android, i0s or your computer desktop. Manage your money, check all of your account balances, monitor transactions and keep an eye on stocks. Depending on your financial needs there is a free personal finance software for you

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To begin with, you need to save for your down payment. Work out how much of your income you have left after paying your bills and living expenses. Then put some money into a savings account every month. You want to choose an amount that you're comfortable with, without leaving yourself with money to waste. You should also compare savings accounts to find one that pays a high-interest rate. After you buy your home, you should continue to save. That way you're covered for unexpected repairs to your home or car, or changes in your financial circumstances.

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Prepare For The Unexpected

When buying a house, you should always consider your plans for unexpected financial situations. You need to be able to cover your mortgage payment in any scenario. For example, you might be a high earner and comfortably afford a large mortgage payment, but if you're made redundant, you will no longer have your monthly income to rely on. You should also consider your company's sick pay policy. If you become sick or injured and are absent from work long term, this is likely to have an impact on your monthly income. These things also apply to your partner if you rely on their income. Other things to consider are divorce and the death of a loved one. An insurance policy will benefit you, but you should also aim to have savings in the bank.

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