How much home can you afford?

Just how much home can you afford? There are many aspects to look at. The first thing to think about is just how much you pay monthly for a variety of costs. Do not forget to factor in the following bills:
Monthly child support payments
Monthly auto payments
Monthly credit card payments
Monthly association fees
Other monthly fees
Utilities (phone, power, gas, cable/satellite, and water)
You will also need to think of your charges that are not monthly, such as your auto insurance and property taxes on your vehicle. For example, take your auto insurance bill (paid every 6 months) and divide it by 6. Add this to your monthly costs.

Now it is time to identify your monthly income. While most banks and mortgage brokers will use your gross income (before taxes) in their calculations, you should use your take home pay instead. This is a more reasonable number. If your salary fluctuates, then use the lowest monthly income that you have been given in the last year. This will mean that you will most likely meet the requirements for a less expensive house. It will be a house that you can easily afford and you will run less risk of losing your residence.

You need to remember that you will have monthly expenditures as a homeowner that you do not have as a renter. Most mortgages will include your homeowner’s insurance and home property taxes in your monthly payment. However, the mortgage calculators do not include those figures when telling you what you can afford. If there is a homeowner’s association, then you must include the monthly homeowner’s association (HOA) fees in your calculations. In some cases, this will mean that you cannot afford the home.

Most lenders want to see a total debt-to-income ratio of 36% or less. They also would like to see a housing payment-to-income ratio of 28% to 33%. For your peace of mind, try to keep your monthly payment to 25% or less of your take home pay. You should also factor in your savings needs. Are you saving for your children’s college education or for your retirement ? Factor in these expenses as well.

Mortgage lenders are tightening the requirements for mortgages. The better your personal financial situation is the better. Before taking into consideration purchasing a home, you should work on paying off as much of your personal debt as possible. Have your credit report run so that you will be conscious of any problems with your credit. If there are any, you need to work on fixing them first. Higher credit scores equal lower interest rates. Work on saving as much money as possible for your down payment. If you have a down payment of 20% or more of the purchase price, then you will save $50 to $80 a month by not having to purchase private mortgage insurance (PMI).

Finally, yet prominently, do not forget your closing costs. You could wind up paying points in order to obtain a better interest rate. Each point is 1% of the loan amount. Your lender will demand an evaluation of the property to make sure that the property is worth what you are paying. You are liable for paying this fee at closing. You will also be accountable for paying title insurance. This safeguards your right to the residence. You will need to have the property looked over for completing the offer. There is also the first year’s fee for homeowner’s insurance, transfer taxes, attorney fees, title search fee, and an advance on the property taxes (to be placed in your escrow account). Some or all of these fees will be due at the closing.