Decide how much you can afford for a house before you shop for it, not after. It is unfortunate that a lot of people do not perform this exercise and then spend countless hours looking for a house they cannot afford, only finding out when they apply for a mortgage.
There are a number of factors that influence how much you can spend on a home, including household income, the amount of the deposit, and the market rates and closing costs on mortgages in your area. Lenders will also look at your current debt and fixed expenses, since you will have to go on paying those and they want to make sure you have enough income left to pay the home loan.
Most lenders will have a ratio that takes into account income, current debt and financial commitments, interest rate and closing costs to figure how much a borrower can afford.
It is possible to calculate these costs on a worksheet, or you can contact a mortgage broker who will be happy to do it for you.
In many cases, having a sufficient down payment is the hardest part of home ownership. Today, people don?t put aside a certain amount of money into a savings account to save up for things they need. We can forget about no down payment mortgages now that the credit crunch in the real estate market has forced lenders to be more strict about their terms.
A minimum of a 10% deposit will normally be demanded. So, if you are looking in the $200,000 price range, you have to have $20,000 on hand, plus enough for closing costs. A bank can easily give you an estimate of closing costs.
A minimal estimate of closing costs would be $5,000, making a total of $25,000. The next step is to find out what your monthly payments will be. You can figure how much you can pay based on salary and current expenses if you visit one of the many calculators available on the net, or you can take a simpler route and speak to a mortgage consultant.
The traditional rule is that your housing costs should not be greater than 25% of your income. But this does not take into account extraneous credit card debt. The lender expects you to use the balance after the 25% for such items as clothing, utilities, education and savings, not high monthly payments on a card. If you have high credit card debt that has to be serviced, that will be deducted from your income when the bank is calculating what you can afford.
Barring excessive credit card balances, you can calculate that if you earn $6,000 a month, you can afford to pay $1,500 for the home loan, taxes and insurance. This is at least a starting point for your shopping trip for a new home.
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