How Much House Can You Afford?
One of the most important items to determine BEFORE you go looking for a new home is what you can afford to pay for it. It is a sad fact that most borrowers have no clue how much they can afford to pay for a home and end up wasting their time looking at houses that they discover, once they apply for a home loan, are way out of their price range.
If you understand how banks determine the mortgage you can afford by examining your income, amount of down payment and total closing costs, you will have a better concept of this. Total expenses will be examined by the lender to make sure you will be able to pay down the loan they are granting you.
Most banks will have a ratio that takes into account income, current debt and financial commitments, interest rate and closing costs to estimate how much a borrower can manage.
You can try to estimate these costs yourself, or you can make it easy on yourself by consulting with a mortgage professional who will do this for you.
The first thing that most folks have an issue with is having enough of a deposit to begin with. Many people today are not able to put aside some savings to accumulate the necessary funds for a decent down payment. We can forget about no down payment loans now that the credit crunch in the real estate market has forced banks to be stricter about their terms.
A minimum of a 10% deposit will typically be demanded. This means that for a median priced house of $200,000, you will have to save the minimum amount of $20,000 for the down payment, and the additional funds for closing costs. You can get an estimate of closing costs from your bank.
So let us figure that you need $25,000 to start shopping for a home. Now you have to be concerned about what you can afford for a monthly basis. There are sites on the internet that can assist you to figure how much you can afford per month once you enter all income and debt, or just speak to your mortgage professional.
Typically, the standard used is that your home costs should not exceed 25% of your income. High credit card debt will affect your disposable income, remember. The lender expects you to use the remainsafter the 25% for food, clothing, utilities, education and savings, not high monthly payments on a card. If you are spending a lot on credit card debt, your income will be reduced, since you will have less money to devote to the loan.
Without these additional issues, figure 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 house.
