| Experts say you will typically
spend about a third of your income on financing
your home. Before you start to look for your dream
house, you should figure out just how much of
that dream you can afford.
Mortgage lenders look at your ability to repay
the mortgage loan by reviewing:
• Your credit history
• Your monthly gross income
• How much cash you can accumulate for a
down payment, which is usually 10 percent to 20
percent of the sale price.
For details on checking your credit history, see
the bankrate.com report "Credit: The Basics."
Tip
Planning is the key to a successful home purchase,
said Doug Anderson, a member of the National Association
of Mortgage Brokers. The Denver, Colo., broker
says in today’s market interest rates are
low, but real estate prices are high.
"You should pay off as much debt as you
can before shopping for a house," said Anderson,
such as car loans and credit card bills. "And
try to save a couple of hundred dollars a month
for the down payment to bring down the loan amount."
General guidelines
You can easily determine how much house you can
afford by following a few general guidelines:
• Your monthly mortgage payment -- including
principal, interest, real estate taxes and homeowners’
insurance -- should not be more than 28 percent
of your gross monthly income (before taxes). This
is your housing expense ratio.
• Your total monthly debt obligation should
not be more than 36 percent of your gross income.
Total debt includes the mortgage payment plus
other obligations such as car loans, child support
and alimony, credit card bills, student loans,
condominium association fees. (Note: Government
and certain other lenders may be more lenient.)
This is your debt-to-income ratio.
Example
Let’s take a homebuyer who makes $40,000
a year. The maximum amount of money available
for a monthly mortgage payment at 28 percent of
gross income would be $933. However, the lender
says the total debt payments each month should
not exceed 36 percent, which comes to $1,200.
The following chart may help you see what is
your maximum monthly debt loan based on your annual
gross salary:
| Gross income |
28% of Monthly |
36% of Monthly |
| $20,000 |
$467 |
$600 |
| $30,000 |
$700 |
$900 |
| $40,000 |
$933 |
$1,200 |
| $50,000 |
$1,167 |
$1,500 |
| $60,000 |
$1,400 |
$1,800 |
| $80,000 |
$1,867 |
$2,400 |
| $100,000 |
$2,333 |
$3,000 |
| $150,000 |
$3,500 |
$4,500 |
Taxes and Insurance
There are a few other considerations to compute
when deciding how much home you can afford:
• Real estate taxes -- Since taxes are
part of your monthly mortgage payment, it is important
to get an estimate of the property taxes in the
area where you want to look for a home. You can
ask your real estate agent, or call the tax office
in the town where you are house hunting and ask
what is the local tax rate.
• Homeowner’s insurance -- You must
insure your property in order to obtain a mortgage.
You can get an estimate of insurance costs from
your insurance agent or a major insurance company
in the area where you are house hunting. Be sure
to inquire about special requirements for hazard
insurance, such as mandatory coverage for floods,
earthquakes, or windstorms in coastal areas. If
you put down less than 20 percent of your home's
value, you also will have to pay private mortgage
insurance (PMI).
Calculator
Armed with the above information, check out the
bankrate.com calculator, "How much house
can you afford?" Note: The calculator asks
if there is any mortgage insurance. See the section
on private mortgage insurance (PMI) for more details.
Another key in determining how much house you
can afford is the down payment.
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