HOME BUYERS FAIR : Finance Options : Knowing How Much House You Can Shop For
Figuring out how much home you can afford can save you money and time, no matter what kind of house you want to buy.
When should you begin? Even before you start looking, it is wise to sit down with a realtor or lender and jot down out what you can really afford.
Just follow these simple guidelines and you can quickly determine what homes are in your price range.
All home shoppers need to consider three major factors in determining how much they can afford: the down payment, their ability to qualify for a mortgage and closing costs.
The Down Payment
Most loans today require a minimum down payment of at least 10%--and often it’s 20%. Those who can afford to put even more down are rewarded by lenders. If you are able to come up with a 25% down payment, many lenders offer special “priority” loan service, with a shortened qualification process that can result in closing your loan in as few as 10 days.
Qualifying
Most lenders require that the monthly mortgage payment, consisting of principal, interest, taxes and insurance (PITI) be no more than 25% to 28% of a borrower’s gross monthly income.
First-time buyers must remember to account for the additional income that will result from this major tax break, with fully deductible interest.
The total monthly outlay for all debts for home buyers--from installment to revolving charge accounts--should range from no more than 33% to 38% of their gross monthly income.
That’s a general rule of thumb, but four key factors specifically determine your ability to qualify for a home loan:
--Income. Monthly income is not the only feature a lender examines. Lenders also examine one’s history of employment, stability of income, potential for future earnings, education, vocational training and experience and any verifiable secondary income such as bonuses, commissions, child support and dividends.
--Credit report. This encompasses the would-be borrower’s history of debt repayment, total outstanding debt and total available credit. Lenders look closely at credit reports. If there are negative issues to be resolved on your report, be prepared to fully explain each item.
--Assets. This is calculated by cash on hand and other liquid assets used for the down payment, including savings accounts, current checking account balances, certificates of deposit, stocks and bonds. If you are receiving your down payment as a gift, that can be considered an asset, too.
In the final evaluation the home you are buying must be appraised to determine that it has adequate value and is marketable to ensure that it will secure the loan.
Finally, buyers should remember to plan ahead and keep their finances in good order. Here are three things you can do:
--Avoid late payments on your credit accounts. A good credit history is an important asset. A blemished record can be a genuine liability. Request a credit report before you apply for a loan and make certain it is accurate. If it is incorrect, have it corrected quickly.
--Don’t make major purchases before getting your loan. Some experts suggest that you postpone purchases of large items such as furniture, appliances or a new car until after your loan has been funded and the transaction has closed. This will limit your total debt and keep your assets high.
--Consider consolidating your loans. You can take out a single, long-term loan and use the proceeds to pay off your student and auto loans, credit cards and other debt obligations. Stringing the loan out for several years can reduce your monthly debt payments, which in turn may help you better meet a lender’s monthly debt ratio.
Closing Costs
Don’t forget about the closing costs. Besides the down payment, buyers must pay fees for the loan and other fees, including “points,” to originate the loan. Each point is 1% of the mortgage loan. You can expect to pay between 1 and 5 points for your home loan. These charges must be paid in cash at the time of the final transaction, unless you choose, and are able, to include these in their financing.
Your lender or realtor can help estimate the total fees and closing costs before you complete the final transaction.
While total closing costs will range between 2% and 6% of your mortgage loan, be certain to find a lender that keeps these costs to a minimum. For example, some lenders will include miscellaneous fees such as inspection, photocopying, notarization and document preparation in the loan fee instead of tacking on additional charges. Some have in-house appraisers and do not charge for an appraisal. It pays to ask in advance, as you can save hundreds, sometimes thousands, of dollars by choosing the right lender.
INCOME YOU’LL NEED TO BUY A HOME
What price home you can afford to buy, based on your annual income.
Annual Income Mortgage Amount* Home Price** $20,000 $47,200 $59,000 30,000 70,800 88,500 40,000 94,400 118,000 50,000 118,000 147,500 60,000 141,600 177,000 70,000 165,200 206,500 80,000 188,800 236,000
* Determined by qualifications for a conventional loan covering 80% of the home price.
** Price is rounded to the nearest hundred.
SOURCE: National Assn. of Realtors
