Friday, March 17, 2017 / by David Connell
In step two we’ll be going over calculating how much home you can afford. Once the time to buy a new home arrives you should consider a variety of things when you’re trying to estimate how much home you can afford. You’ll need to look at affordability in comparison with your total debts. This calculation should include your total monthly expenses; such as car loan payments, credit cards, utilities, the eventual cost of your mortgage, and taxes. As well as any other financial obligations or other monetary concerns you have. We’ll go over the basic guide lines and terms below.
1. Debt to income ratio.
· The lender will typically consider the overall debt you’re carrying versus your pre-tax income to get a Debt-to-Income ratio. This is the percentage of your income that is applied to your existing debts and your future mortgage. This includes things like student loans, car payments, and even child support and alimony. A DTI of 36% is generally the golden rule. This will vary a few percentage points depending on the lenders guidelines as well as the loan program you are using.
2. Monthly Payments.
· Your monthly payments are a key part of your home budget. Make sure to take everything into account, not just debts you may have but also your utilities and whatever you have budgeted for food and fuel to get to work. It’s also a good idea to include a percentage of your income that you set aside for savings or investments.
3. Down-payment amount.
· Your Down-Payment is the amount of money you have set aside to use for an upfront payment on your home. For conventional loan programs, this can range from the recommended high of 20% to a minimum of 5%. 20% is recommended so that you can avoid paying for Private Mortgage Insurance or PMI. We’ll cover this in another post about applying for the mortgage. It is important to note that if you’re not making a down-payment of 20% you’ll need to add in the cost of PMI when adding up your expenses. Other down-payment percentages can range from 3.5% or less if you’re using certain loan programs such as FHA, THDA, USDA or VA if you have served in the military and qualify for Veterans benefits. We’ll be covering all of the programs in our post about applying for your Mortgage. When you start planning to buy a home it’s important to plan ahead so you know how much you’ll need to start setting aside for your down-payment.
4. House-hold Income.
· Your house-hold income is the total gross income you and any co-borrower, such as a spouse or partner, bring in on a yearly basis. Be sure to account for all income sources, such as hourly wages, salary, rental incomes, commissions, stocks and bonds, and income from any businesses you may own or partner in.
5. Property tax.
· This is the total amount of property taxes that you will have to pay on the home you’ll be buying. This tax is paid to your county and city and is calculated using a percentage of your home’s value. This is will vary from place to to place and is determined by local ordinance. When you buy a home, you may be required to pay a prorated portion of the taxes that are due on the property. This will be added into you closing costs, which we’ll talk about later in the post.
6. Finding the Home for you.
· That last thing we’re going to go over in this post is finding a home you love in a price range you can afford. This is the point where it’s advisable to bring in a Real Estate agent. As an industry professional, your agent can bring to bear their knowledge and experience as well as powerful search tools to help you find the perfect home. We’ll base our search off your individual needs, such as location, home features, price points, schools and any other factors that are important to you and your family. Not only will your agent work to represent your best interests but they will also be there to walk through the entire home buying process from start to finish.
I really hope you enjoyed this post and found the information helpful. I’ll continue to cover the rest of the Steps to Home-Ownership in next week’s post on getting Pre-Qualified.
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