How Much House Can You Afford?
Experts say you will
typically spend about a third of your income on financing your home.
Before you start to look for your dream house, you should figure out just
how much of that dream you can afford.
Mortgage lenders look at
your ability to repay the mortgage loan by reviewing:
Your credit history
Your monthly gross income
How much cash you can
accumulate for a down payment, which is usually 10 percent to 20 percent
of the sale price.
For details on checking
your credit history, see the bankrate.com report "Credit:
The Basics".
Home-Buying
Tip
Planning is the key to a successful home purchase, said Doug Anderson, a
member of the National Association of Mortgage Brokers. The Denver, Colo.,
broker says in today's market interest rates are low, but real estate
prices are high.
"You should pay off as
much debt as you can before shopping for a house," said Anderson,
such as car loans and credit card bills. "And try to save a couple of
hundred dollars a month for the down payment to bring down the loan
amount."
General
Guidelines
You can easily determine how much house you can afford by following a few
general guidelines:
Your monthly mortgage
payment -- including principal, interest, real estate taxes and
homeowners insurance -- should not be more than 28 percent of your gross
monthly income (before taxes). This is your housing expense ratio.
Your total monthly debt
obligation should not be more than 36 percent of your gross income.
Total debt includes the mortgage payment plus other obligations such as
car loans, child support and alimony, credit card bills, student loans,
condominium association fees. (Note: Government and certain other
lenders may be more lenient.) This is your debt-to-income ratio.
Example
Let's take a homebuyer who makes $40,000 a year. The maximum amount of
money available for a monthly mortgage payment at 28 percent of gross
income would be $933. However, the lender says the total debt payments
each month should not exceed 36 percent, which comes to $1,200.
The following chart may
help you see what is your maximum monthly debt loan based on your annual
gross salary:
| Gross
income |
28%
of monthly |
36%
of monthly |
| $20,000 |
$467 |
$600 |
| $30,000 |
$700 |
$900 |
| $40,000 |
$933 |
$1,200 |
| $50,000 |
$1,167 |
$1,500 |
| $60,000 |
$1,400 |
$1,800 |
| $80,000 |
$1,867 |
$2,400 |
| $100,000 |
$2,333 |
$3,000 |
| $150,000 |
$3,500 |
$4,500 |
Taxes
and Insurance
There are a few other considerations to compute when deciding how much
home you can afford:
Real
estate taxes -- Since
taxes are part of your monthly mortgage payment, it is important to get
an estimate of the property taxes in the area where you want to look for
a home. You can ask your real estate agent, or call the tax office in
the town where you are house hunting and ask what is the local tax rate.
Homeowner's
insurance -- You must
insure your property in order to obtain a mortgage. You can get an
estimate of insurance costs from your insurance agent or a major
insurance company in the area where you are house hunting. Be sure to
inquire about special requirements for hazard insurance, such as
mandatory coverage for floods, earthquakes, or windstorms in coastal
areas. If you put down less than 20 percent of your home's value, you
also will have to pay private mortgage insurance (PMI).
Calculator
Armed with the above information, check out the bankrate.com calculator, "How
much house can you afford?" Note: The calculator asks if there is
any mortgage insurance. See the section on private mortgage insurance (PMI)
for more details.
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