Can You Afford A House?
by Brian Daniel
The time
has come to buy a house. Questions buzz around in your head like a
swarm of angry bees: “How much can I borrow? How much do I have to put
down? How much will my payments be?” Well, let me suggest starting with
the “How much can I borrow?” question.
There
are many factors you need to take into consideration when purchasing a
home. First and foremost, ask yourself what size monthly payment you
can afford. When determining how large a mortgage you can afford, be
sure to factor in all your current expenses such as car payments,
credit card bills, student loans, utilities, and the like. You may also
want to factor in how much you spend on things like entertainment,
eating out, and traveling. You don't want to add a mortgage payment and
say goodbye to your social life. Instead, you want to make sure that
you're not overextending yourself financially so you can enjoy a good
quality of life.
At the
present time, most lenders will allow for a whopping debt-to-income
ratio of 45% - 50%. Your debt-to-income ratio is the sum of your
mortgage payment and any other credit card or loan payments, divided by
your monthly gross income. Lenders use this ratio to help determine
your credit worthiness. All of your revolving debts along with your
mortgage payment divided by your monthly gross income should not exceed
the 36% - 45% debt-to-income ratio. Here’s a quick formula to help you
figure out how much you can afford to put toward your monthly house
payment:
--Multiply
your gross monthly income by 0.45
--Subtract your non-mortgage debt payments from the result
--What's left is your allowable mortgage payment
So, if
we have a couple with a combined monthly gross income of $5000 and they
pay $700 a month toward two auto loans and one credit card, they would
qualify for a monthly payment of $1550.
In case
you don’t know, not all of your monthly housing payment goes toward
your principal and interest. A portion must go toward homeowner's
insurance and property taxes. I mention this because on most mortgage
calculators that’ll you use, you’ll need to enter these figures to get
an accurate idea of what your real monthly mortgage payment will look
like, and you’ll need the numbers to figure out how much of a house you
can afford.
Property taxes are typically a percentage of your home's assessed
value. To calculate property taxes, local jurisdictions generally
multiply the tax rate by a home's assessed value. For example, if you
pay 0.5% in property taxes of the assessed value, a home assessed at
$250,000 would have a yearly property tax bill of $1,250. In order to
find out the tax rate, you will need to contact your county tax
assessor, or a local mortgage broker or bank may be able to assist you.
As for the homeowner’s insurance, your best bet is talking to a local
broker or bank to get a general idea of what it is for your area.
Mortgage calculators will ask you for a percentage rate sometimes and
others will ask for a yearly figure. It can be confusing for a new
buyer; so don't be afraid to seek a little assistance.
Figuring out how much you can afford to put toward your monthly house
payment is a start. Now, you want to know how much house you can
afford. There are mortgage calculators galore that will help you do
this, but, as I mentioned above, they will require you to enter real
estate taxes, homeowner’s insurance, and interest rates. Once you know
how much you can comfortably spend a month toward a home, and you’ve
gathered your tax and insurance rates, you only need an idea of what
kind of interest rate you’ll get. You can probably kill three birds
with one stone by trying to get rates for the taxes, insurance, and
interest rate in one phone call. Once you have an idea of what your
interest rate may be, you can plug in all your numbers on any of the
numerous mortgage calculators on the internet to get a good idea of
what you think you can afford. Afterwards, if you like, you can call a
local bank or broker and get pre-qualified to see if you’re numbers
were in the ballpark. If your figures are similar, congratulations on a
job well done. If your results are different, take the time to figure
out why and don’t be afraid to ask questions. Remember, buying a house
is one of the biggest financial decisions of your life. You owe it to
yourself to be as thorough as you can. By taking the initiative to read
this article, you're already ahead of the learning curve. Keep up the
good work, and happy house hunting.
Brian
Daniel is a loan officer/marketing coordinator for Bend Mortgage Group Ltd. a
mortgage
company in Bend, Oregon. For more information or help with a Bend, Oregon home loan
visit www.bendmortgagegroup.com
