04/03/2025: How Can First-Time Homebuyers Calculate What They Can Afford in a Home Loan?

If you’re hoping to purchase your first home in Brocton, IL, you’ll need to calculate your budget. Home loans have strict affordability criteria, so it’s helpful to get your finances in good shape first, where possible. Although lenders will have their own rules about how much you can borrow, it’s important that you feel comfortable, too. Never take out a loan that you’re not certain you can afford, even if the lender is willing to allow it.

How Can First-Time Homebuyers Calculate What They Can Afford in a Home Loan in Brocton, IL?

How Is Home Loan Affordability Calculated?

Eligibility for borrowing is based on overall affordability rather than just the income you receive. Every lender has their own rules but will broadly follow the same process. This involves assessing your income, expenditure, and any debts to calculate how much you have available to pay for a loan. A financial advisor will be able to confirm the exact criteria that each lender uses.

What Other Factors Should Be Considered?

Lenders will also consider any debts you already have when calculating affordability. More specifically, they will assess what debt obligations you already have compared to your income. This is known as your debt-to-income ratio (DTI). When adding in new home loan borrowing, lenders typically prefer a DTI of 36% or less, with a maximum of 28% allocated to your home expenditure.

If you have a large down payment, your affordability will increase. This is because you will need to borrow less money and your monthly payments will be lower. Borrowing a lower proportion of the cost of the property often reduces the interest rate, too.

How to Assess Your Own Affordability

It’s always advisable to have a comfort margin so you’re not borrowing at the absolute maximum you can afford. This is especially vital for first-time homebuyers, as unexpected costs may occur. It’s a good idea to keep around 1-3% of the property value aside to cover any maintenance and expenses.

Some experts suggest limiting your borrowing to a maximum of 30% of your monthly income. This includes the home loan, taxes, insurance and any fees payable. However, this doesn’t account for any outgoings. An alternative approach is allotting 50/30/20: 50% of your income on essential bills including housing, 30% on discretionary spending, and 20% on savings.

Use a Dedicated Home Loans Calculator

There are various calculators available that can be useful to ascertain the right level of borrowing. By entering information such as your income, monthly payments, and interest rates, you can establish how much you may be able to borrow and the likely cost.

With a history stretching back more than 150 years, we have a proven record in delivering outstanding service to every one of our customers. If you are thinking about a home loan, we can help with access to a range of competitive products. Get in touch with us here at Prospect Bank in Paris, IL to schedule an appointment with one of our friendly advisors.