How Much Can You Afford - Home Loan

Before you start the home buying process, it’s imperative that you realistically determine how much you can afford for a home mortgage. Homeowners run into issues with making their mortgage payments due to several factors.

• Loss of job
• Interest rate increase
• Auto Accident
• Divorce
• Other emergencies.

It’s possible you could afford and qualify for a $700,000 loan but that doesn’t necessarily mean you should push the upper limits of what a lender will qualify you for.

Fortunately or not, the credit crisis going on now has caused many lenders to be more conservative in setting the limits on how much they will lend to a prospective borrower.

Lenders, among other variables primarily look into your income to debt ration (principal, interest, property taxes and insurance) should not consume more than 25% to 28% of your monthly pre-tax income. Loans insured by the FHA (Federal Housing Administration) (FHA) will offer up to 29%.

Depending where you are in searching for a new home and iIf you’ve already found the home of your dreams, you can find out what the property taxes are. You can always call the City Clerks office to find out or ask a local realtor. In estimating your home insurance costs, assume that your annual insurance premiums will be .125% to .250% of the value of the home (value x .00125, or value x .00250). For example, if you’re buying a $200,000 home, you can assume your insurance premiums will be between $250 and $500 a year.

When it comes to determining your income, the lender will also look at other factors (deductions) that will count against your total income value, but they will also look at things to positively affect your income. As an example, they will also look at the amount of overtime pay or bonuses you’ve had for the last 12 to 24 months. Other considered income will include your net income from self employment, any benefits you receive from Social Security, veteran’s benefits or retirement income, alimony, child support, public assistance, workman’s comp or disability payments, interest income, dividend income, and other sources.

When it comes to debts, these are subtracted from your total income. Your lender will determine how much home you can afford by looking at any long term debt payments. These include

• charge cards
• car loans
• liens
• student loans
• real estate loans
• alimony or palimony
• garnished wages
• child support

Basically, anything ove 10 months to pay off or recurring is a Long TerM Debt.

So where does that leave you? In general, lenders are comfortable if your monthly mortgage payments plus any other debt payments are less than 33% to 36% of your monthly pre-tax income. The FHA limit is about 41%.

So if you can lower or eliminate any debt, that’s more of a home loan you can afford. So to maximize the possibility of qualifying for the house of your dreams, try to eliminate as much debt as you can, even if you have to tap into the down payment.

Which brings us to the down payment. Lenders will look at the size of the down payment, but the bottom line is how much you are borrowing. In other words, all things being equal, if you qualify for a $500,000 and you have $100,000 (scenario A) as a down payment - it is almost the same as buying a $400,000 home with $0 (scenario B) down payment. I say almost because the property taxes on the $500,000 house will be more that the other. Also, many lenders will insist on PMI(Private Mortgage Insurance). PMI is the insurance you’ll need to pay to coverthe amount between a loan of 80% and 100%. So in the example above with scenario A, there wouldn’t be PMI and scenario B you would be paying PMI on $80,000 or 20% of the purchase price.

Some cities offer special deals or rates to first time buyers. Check with the city clerk or local realtor to see if they are available. These deals often offer a home with no down payment, 5% down payment, special rates and other benefits. It’s worth looking into.

Generally, 20% is the standard. Your down payment can come from a variety of sources, but it cannot be borrowed money. You can use money from savings, investments, the sale of assets, or pretty much any source other than borrowed money. If you need to borrow money from a friend or relative, the money must be given to you as a gift. The lender may require a letter stating that it is a gift from the source. But be careful about putting that money into one of your bank accounts. The lender frowns on anything out of the ordinary when it comes to your accounts.

Use our calculator as a guide. Keep in mind that emgencies happen. Other things you will need to think about are -

• Emergencies
• HOA (Home Owner Association) Fees
• Utilities
• Tax increases
• Repairs
• Gas prices!?

Best of Luck to you,
Wiliiam

How do I set up a mortgage calculator in Excel?