What Can You Afford to Pay for a House?
The time to decide how much you can afford to pay for a home is before you start to shop for one. This will save you untold hours looking at houses that you should not really be in the market for to begin with.
Understanding how the process of how a lender knows what you can afford to pay for a home will make it easier for you. Total expenses have to be examined by the lender to make sure you will be able to pay down the mortgage 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 house.
You can do these calculations yourself, or you can enlist the aid of a mortgage broker to do them for you.
For most people, affording the down payment is the biggest barrier to buying a home. Today, people don?t put aside a certain amount of money into a savings account to save up for something. No down payment loans are rarely granted today days, since they were such a big part of the mortgage problems over the last couple of years.
A minimum of a 10% deposit will normally be required. So, if you are shopping in the $200,000 price area, you have to have $20,000 on hand, plus a reasonable amount for closing costs. A lender can easily give you an estimate of closing costs.
Five thousand dollars is probably a fair estimate of the amount you will need for closing costs, so be ready to have $25,000 saved up. The next step is to learn out what your monthly payments will be. You can calculate how much you can pay based on income and current expenses if you visit one of the many calculators available on the net, or you can take a simpler route and speak to a mortgage consultant.
As a rule, lenders do not want to see your total cost of housing (mortgage, taxes and insurance) higher than 25% of your income. High credit card debt will have an effect on your disposable income, however. The lender expects you to use the remainsafter the 25% for such items as clothing, utilities, education and savings, not high minimum payments on a card. If you are spending a lot on credit card debt, your income will be reduced, because you will have less funds to devote to the mortgage.
If you net $6,000 a 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 to pay for it.
