HOW MUCH HOME CAN YOU AFFORD?

When you are ready to begin looking at various homes to find your dream home, you need to prepare all of the necessary materials to present to the lender. Your lender well tell you exactly what you can afford so that you don not spend time looking at “too much” home. There are three key factors that you will need to consider when determining how much home you can afford. These are the down payment, your ability to qualify for a mortgage, and the closing costs associated with your transaction.

Down Payment Requirements:

Most loans today require a down payment of between 0% and 5.0% depending on the type and terms of the loan. If you are able to come up with a 20-25% down payment, you may be eligible to take advantage of special fast-track programs and possibly eliminate mortgage insurance.

It is often thought that bigger is better when it comes to down payments. In many cases this may be true. However, the arithmetic will differ from case to case. A bigger down payment means smaller monthly payments and a lower interest expense for as long as you remain with a mortgage. This can be an important factor for many people.

But if you can put your available funds to work for you, so that they can earn more than the interest rate on your loan, you could be dollars ahead with a smaller down payment. Also, a smaller down payment may allow you to keep your extra cash liquid and available for an emergency.

Closing Costs:

Don’t forget to think ahead carefully. In addition to the down payment on your dream home, there are numerous fees for loan processing and other closing costs. These fees must be paid in cash at the time of the final statement, unless you are able to include these in your financing.  Typically, total closing costs will range between 2-5% of your mortgage loan. A more detailed schedule is included in this section detailing your closing costs. Ask Judy about seller-paid closing costs.

Qualifying for the mortgages:

Most lenders require that your monthly payment ranges between 25%-28% of your gross monthly income. Your mortgage payment to the lender includes four items –the PITI. These items are discussed in detail on the following page entitled “Predicting your monthly payment – the PITI.” Remember, when you buy a home all interest is tax deductible so you will qualify for a major tax advantage that will effectively increase your take-home pay. Your total monthly PITI and all debts (from installments to revolving charge accounts) should range between 33%-38% of your gross monthly income. This is a general rule of thumb, but other key factors specifically determine your ability to qualify for a home loan. These factors are:

Income:

History of employment, stability of income, potential for future earnings, education vocational training and background, and the secondary income such a bonuses, commissions, child support, etc.

Credit Report:

History of debt repayment, total outstanding debt and total available credit. If you have concerns about your credit record, consider contacting one of the major credit bureaus for a copy of your file. Contact Equifax, TRW and Trans Union.

Assets:

Cash on hand; other liquid assets such as savings, checking CD’s, stocks, etc.

Property:

The home you are buying must be appraised to determine that it has adequate value and is marketable, to ensure it will secure the loan.

 Determining What You Can Afford

Use this balance sheet as an example of how to determine, generally what you can afford to pay for housing. See your lender for a more exact figure, or to confirm your findings. This is just a very general idea of how to prepare a Balance Sheet. Your Balance Sheet should be more detailed and include all of your monthly expenses.

I. Assets                                                                                                          Your Calculations

            Annual income on IRS return before taxes                                         ______________

            Divide this by 12 to determine                                                            12

            Your Gross Monthly Income                                                               ______________

            Multiply your Gross Monthly Income                                                   ______________

            By .28 (lenders allow you to spend up to                                            .28

            28% of your income on housing)

            This is your maximum Monthly Housing Expenses allowance          ______________

II. Liabilities

            Add together all monthly long term obligations                                   ______________

            Minimum credit card payments                                                          ______________

            Car payments                                                                                     ______________

            Child Support                                                                                      ______________

            Other installment loan(s)                                                                    ______________

            Other installment loan(s)                                                                    ______________

            TOTAL MONTHLY LONG TERM OBLIGATIONS                              ______________

III. Most lenders only allow 36% of gross monthly income to be

     Sent for long term debt plus house payment. To

     Calculate what your house payment can be:

     Multiply your gross monthly income                                                          ______________                         

     36% to determine total debt allowance.                                                     ______________

     Subtract your monthly debt                                                                       ______________       

     Subtract your monthly housing expenses                                                 ______________