So you have been toying with idea of buying
a house. Before you make the big leap you should evaluate
how much home can you afford.
What is the cost of the house?
The first step is assessing what kind of house you are looking
for, in which neighborhood and what price does that house
command in the current real estate market. You may be surprised
with what you find – your dream house may be too expensive
and you will need to look for a smaller house or a different
neighborhood.
What is your budget?
This brings us to our next step - what is your budget? Well!
Here things get complicated. A good way to assess how much
home you can afford is to calculate your housing expense ratio
and debt–to income ratio.
• The housing expense
– is also referred to as front-end ratio. It is the
total amount of funds that you can assess as mortgage on
your gross (pretax) monthly income. According to experts
your monthly mortgage payment should not exceed 28 percent
of your gross monthly income. Please note that your monthly
mortgage payment includes principal, interest, real estate
taxes and homeowners insurance.
• The total debt-to-income –
is also referred to as back-end ratio. It explains the total
amount of funds that you can assess toward all of your debt
obligations on your gross (pretax) monthly income. According
to experts your monthly debt obligations should not exceed
36 percent of your gross monthly income. Please note that
your debt obligations include mortgage, car loans, child
support and alimony, credit card bills, student loans and
condominium fees.
Calculate the real cost of owning
a home
Another important aspect to remember is to calculate the real
cost of your home. You will need to consider the following:
• Mortgage
• Down payment
• Closing costs
• Home owners Insurance
• Property Taxes
Be prepared to pay for repairs and maintenance.
So don’t operate on a shoe-string budget. You should
always factor in something breaking while you live in the
home.
How much can you borrow?
Basically, the mortgage lender’s qualification is -
your ability to repay the mortgage. Depending on you FICO
score, past delinquency and current income, the mortgage agency
would offer you a mortgage plan. Another requirement by the
lender is – he will need accurate estimates of how much
you will pay every month for property taxes and homeowners
insurance. However, remember to shop around for mortgage as
different agencies have different criteria for selection and
offers.
How much down payment can you make?
How much you can afford is also affected by the amount of
down payment you can make. The higher the down payment, lower
the rate of interest on your mortgage. Ideally, you should
try and make a down payment of at least 20 % of the home value.
Type of Mortgage Taken
Unless you have an adjustable rate mortgage, mortgage payments
decrease over a period of time. Then you have the 15 year
or 30 year mortgage – each has its effect over the monthly
payment that you would be required to make.
By knowing your budget and the market ahead of time, you will
spend less time speculating abut what you can and can not
afford. Knowing these basics will make you a more informed
buyer and make the process of shopping for a new home a little
less overwhelming.
