Understanding What You Can Pay For A Home
The time to determine how much you can afford to pay for a house is before you start looking for one. It is unfortunate that a lot of people do not perform this exercise and then spend countless hours looking for a house they cannot afford, only finding out when they apply for a mortgage.
Understanding how the process of how a lender knows what you can afford to pay for a home will make it easier on you. 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 home loan.
Most lenders will have a ratio that takes into account income, current debt and financial obligations, interest rate and closing costs to figure how much a borrower can manage.
You can do these calculations yourself, or you can enlist the assistance of a mortgage consultant to do them for you.
In most cases, having enough deposit is the hardest part of home ownership. Today, people don’t put aside a certain amount of money into a savings account to save up for something. Lenders are no longer offering the dangerous no down payment loans now that credit is tight and they have to be more careful.
Assume at least a 10% deposit to buy a house. So, if you are looking in the $200,000 price range, you have to have $20,000 on hand, plus a reasonable amount for closing costs. A lender can supply you with a good faith estimate of your closing expenses.
A very low assumption would be that you have to make $25,000 available. Now you have to be concerned about what you can afford to pay on a monthly mortgage. There are sites on the internet that can assist you to figure how much you can afford to pay once you enter all income and debt, or just consult with your loan professional.
The traditional rule is that your home costs should not exceed 25% of your income. But this does not reflect extraneous credit card debt. The balance of your income above 25% should be used for food, utilities, savings, education and entertainment. If you are spending too much on credit card debt, your income will be reduced, since you will have less money to devote to the mortgage.
Barring high credit card debt, you can figure that if you earn $6,000 a month, you can afford to pay $1,500 for the mortgage, taxes and insurance. This is at least a jump off point for a shopping trip for a new house.
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