Make Sure You Know How Much Home You Can Afford
Decide how much you can afford for a home before you shop for it, not later. This will save you untold hours looking at houses that you should not really be in the market for to begin with.
If you understand how banks determine the mortgage you can afford by examining your income, amount of down payment and total closing costs, you will have a better concept of this. Lenders will also look at your current debt and fixed expenses, since you will have to go on paying such bills and they want to make sure you have enough income left to pay the mortgage.
To do this, lenders use certain ratios that tell them what you will be able to afford, ratios calculated on income, expenses, debt, down payment and closing costs.
You can calculate these factors to within some degree of accuracy, or you can contact a professional mortgage expert who can assist you with these calculations.
The first thing that most folks have a problem with is having enough of a deposit to begin with. Many people new are not able to put aside some funds to accumulate the necessary funds for a decent down payment. We can forget about no down payment mortgages now that the credit crunch in the real estate market has forced banks to be stricter about their terms.
Assume at least a 10% deposit to buy a house. So, if you are looking in the $200,000 price area, you have to have $20,000 on hand, plus a reasonable amount for closing costs. You can request an estimate of closing costs from your bank.
A very low estimate of closing costs would be $5,000, which makes a total of $25,000. Can you also afford the mortgage payments? You can visit many sites on the internet that will help you calculate what you can afford for a monthly home loan, or you can call a mortgage broker.
The traditional rule is that your housing costs should not exceed 25% of your income. Excessive credit card debt will have an effect on your disposable income, however. They have to make sure you have enough money to pay the mortgage after you have paid for your food, utilities, education and other such expenses. Spending too much to pay for your credit card debt will give you less disposable income to pay your mortgage.
Barring high credit card debt, you can figure 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.