How Much Home Can You Afford?
One of the most important items to determine BEFORE you go looking for a new home is how much you can afford to pay for it. Many hopeful home buyers fail to do this and spend countless hours looking at homes that are way out of their price range.
Understanding how the process of how a lender knows what you can afford to pay for a house will make it easier on you. Total expenses will be examined by the bank to make sure you will be able to pay down the mortgage they are granting you.
Most banks will have a ratio that factors income, current debt and financial obligations, interest rate and closing costs to estimate how much a borrower can afford.
It is possible to calculate these costs on a worksheet, or you can contact a mortgage broker who will be happy to make the calculations for you.
In most cases, having a sufficient deposit is the hardest part of home ownership. We are simply not in a savings oriented society and many have a hard time saving that elusive next egg. We can forget about no down payment loans now that the credit crunch in the real estate market has forced lenders to be stricter about their terms.
Assume at least a 10% down payment to buy a house. This means that for a median priced house of $200,000, you will have to save the minimum amount of $20,000 for the deposit, and the extra funds for closing costs. A bank can readily give you an estimate of closing costs.
So let us suppose that you need $25,000 to start shopping for a house. Now you have to be concerned about what you can afford for a monthly mortgage. You can look at many sites on the internet that will help you estimate what you can afford for a monthly home loan, or you can call a mortgage broker.
As a rule, lenders do not want to see the entire cost of the home (mortgage, taxes and insurance) more than 25% of your income. Lenders will examine this closely, more so if you have high 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 service your credit card debt will leave less disposable income to pay your home loan.
If you net $6,000 per month, you can afford a mortgage payment of about $1,500 (25%), barring any other large, standing expenses. This is the best way to shop for a home, once you really know how much you can afford.
