Understanding What You Can Pay for a Home
October 10th, 2009 by Tomas B. PiperDecide how much you can afford for a home before you shop for it, not after. Many prospective home buyers fail to do this and spend countless hours looking at homes that are way out of their affordable price range.
If you understand how banks determine the mortgage you can afford by looking at your income, amount of deposit and total closing costs, you will have a better concept of this. Total expenses have to be examined by the lender to make sure you will be able to pay down the loan they are giving you.
There are some rule of thumb ratios that many lenders use that take into account your income and expenses, debt ratios and closing costs, to determine what you can afford to pay for a home.
You can try to estimate these costs yourself, or you can make it easy on yourself by consulting with a mortgage consultant who can do this for you.
In many cases, having a sufficient down payment is the most difficult part of home ownership. We are no longer in in a savings oriented society and most people have a hard time saving that elusive next egg. We can forget about no down payment mortgages now that the credit crunch in the real estate market has forced banks to be stricter about their terms.
Usually, you won?t be in a position to close on a home loan without at least a 10% deposit. This means that for a median priced home of $200,000, you will have to have the minimum amount of $20,000 for the down payment, and the extra funds for closing costs. A bank can give you a good faith estimate of your closing costs.
So let us figure that you need $25,000 to start shopping for a home. The next step is to find out what your mortgage payments will be. There are mortgage affordability calculators on the internet, or you can ask a mortgage consultant to do these calculations for you.
The standard rule of thumb is that your mortgae costs should not exceed 25% of your income. Excessive credit card debt will affect your disposable income, remember. The balance of your income above 25% should be used for food, utilities, savings, education and entertainment. Spending too much to service your credit card debt will leave less disposable income to pay your home loan.
If your income is $6,000 per month, this rule of thumb means that you can afford $1,500 per month for your mortgage. Now you have some figures in hand to start looking for a home.
