Find Out How Much House You Can Realistically Afford
By Sadiya Anjum
When you are considering buying a home, perhaps the first issue you much tackle is your financial situation. It is important to know if you are prepared to handle the costs of owning a house. There are some general guidelines and calculations that can help you determine exactly how much house you can afford.
When shopping for loans, there are different kinds of loans to pick from and different lenders offering various loan packages. But before you believe what any lender tells you about how much you can afford, find out realistic figures by yourself which are suitable for your lifestyle.
Firstly calculate your debt to income ratio and your front end ratio (housing costs). These ratios will help you determine how much debt you are in and how much loan you can afford. The front end ratio is the percentage of your income that is employed for housing. To determine your monthly mortgage payments, multiply your income (before taxes) by 0.28 and the result is the maximum limit you can afford.
Your debt to income ratio indicates the percentage of your income required to pay total debt every month. To calculate divide your total debt by your gross monthly income. The result should not exceed 0.36. Your total debt includes: home loan (rental expenses), car loan, student loan, credit cards, etc. but not utilities and insurance. The maximum debt to income ratio acceptable is 36% and for housing it is 28% of your income. If your debt to income ratio is higher than 36% it is best to pay off some debt before thinking of buying a home.
In addition, obtain a copy of your credit report. If there are any inaccuracies you must dispute and get them fixed. Usually a credit score of 680 and above is considered good and this will help obtain a loan with favorable terms and interest rates. In fact, the maximum limit of your debt to income ratio and for housing may go higher if you have a good credit score. This means you will be allowed to borrow more since a good credit history means you show lower risk allowing the lender to be generous to you.
The third aspect of money you should consider includes your down payment and closing costs. A down payment of less than 20% will subject you to higher interest rates, PMI and other unfavorable terms. Closing costs may vary from anywhere between 3% and 6% of the total loan amount and you should be prepared for these costs too. Using a mortgage calculator can help you view your amortization schedule over the life of the loan.
When you are performing all these calculations, what you must consider is what you can realistically afford. The figures may show that you can afford a certain amount but will you actually be able to? What lenders and figures do not consider is your lifestyle and spending habits.
Firstly calculate your ratios using the income after taxes. This is what you will be able to realistically afford even though your lender may dole out a higher amount. Consider your spending habits: if you are used to splurging or extra comfort you may have to make a few sacrifices. But these sacrifices and changes are not going to happen overnight. It is best if you keep this in mind before agreeing for the maximum loan amount you qualify for. If you are unable to make payments later, you stand the risk of losing your new home. Also remember that owning a home is drastically different from renting one. You have to at least consider insurance, utilities and maintenance if not decorating and landscaping.
It is not that owning a home with a small income is a bad idea, it just means that you should know exactly how much you can afford. Be honest with yourself and practical in your outlook. One reason why people face foreclosure today is simply because they bought more home than they could afford. So get an insight into your financial situation, perform your calculations and then shop for lenders to see what all they have to offer. All of this should happen before you start looking for homes on the market.
Article Source: ChoiceOfHomes.com - Home Selling and Home Renting made easy.This article may NOT be reprinted in any form without the express written consent of ChoiceOfHomes.com
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