Make Sure You Know How Much Home You Can Afford

The time to decide how much you can afford to pay for your home is before you start looking for one. Sadly, most borrowers have no clue how much they can afford to pay for a home and end up wasting their time looking at homes that they discover, once they apply for a mortgage, are way out of their price range.

It is important to understand what lenders will use to decide what you can afford, such as your total income, how much you are depositing, what the closing costs will be, etc. Lenders will also look at your current debt and fixed expenses, since you will have to go on paying those and they want to make sure you have enough income left to pay the mortgage.

Most lenders will have a ratio that factors income, current debt and financial obligations, interest rate and closing costs to estimate how much a borrower can manage.

You can calculate these factors to within some degree of accuracy, or you can visit a professional mortgage expert who can help you with these calculations.

In many cases, having a sufficient down payment is the most difficult part of home ownership. Today, people don?t put aside a certain amount of money into a savings account to save up for things they need. Lenders are no longer offering the dangerous no down payment loans now that credit is tight and they have to be more discriminating.

Usually, you won?t be able to close on a home loan without at least a 10% deposit. So, if you are shopping in the $200,000 price range, you have to have $20,000 on hand, plus enough for closing costs. You can get an estimate of closing costs from your bank.

A very low assumption would be that you have to have $25,000 available. Now the lender will ask whether you can afford the monthly payments. There are mortgage affordability calculators on the net, or you can ask a mortgage professional to do these calculations for you.

The standard rule of thumb is that your mortgae costs should not be more than 25% of your income. But this does not reflect extraneous credit card debt. If you are spending 25% of your income on your home, the rest is (in a perfect world) supposed to be spent on utilities, food, entertainment, education and savings. Spending too much to pay for your credit card debt will leave less disposable income to pay your home loan.

Without these complications, you can count that a monthly income of $6,000 means that you can afford to pay $1,500 in mortgage, taxes and insurance. This is at least a starting point for your shopping trip for a new home.

Tagged with: Home • Insurance • Life Insurance • mortgage • mortgage life insurance • real estate

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