What Can You Afford?

What Can You Afford?

Discovering how much home you can afford is the right first step in the home buying process. This can be a time consuming and sometimes frustrating process. You must start-collecting information from sources such as pay stubs, tax returns, bank statements and the like. If you work with a reputable and experienced lender it can be a much smoother process.
If you would like a simple way to calculate what you can afford for yourself, we have provided a formula to do so. We also recommend you do talk to a lender before you begin the shopping process (see the information on the buyers page).

First you need to have an idea what the current interest rate is. You can easily find this by going to the home pages of MSN.com, YAHOO.com, or any of the other larger web servers. Interest rates are usually posted somewhere on the home page under financial services.

Once you have a general idea of the rate you can apply the do it- yourself formula contained herein.

Steps

1. Calculate your gross monthly income - this is the amount you take home before deductions. Make sure to include your spouse’s income, or any other income.

2. Multiply the income by 36% (.36). This is known in the lending world as the “debt ratio”

3. Calculate long-tern monthly debts. (Those would be considered anything you owe monthly over a 10-month period). Things such as car payments, ongoing credit cards, alimony/child support, or other regular monthly payments. Subtract those from your gross income. What’s left (with a 10% down payment) is a general rule of thumb with lenders to determine what borrowers can afford. Depending on the company, these ratios may change depending on credit scores –for example 33% with 5 % down, or 38% with a 20% down. They may be higher or lower.

4. Taxes - Add what you would guestimate the yearly taxes would be for the property plus homeowners insurance for a year and divide by 12 to give you the amount you need to deduct as per calculation # 3 (as though they were ongoing debts). The result is a ballpark guestimate of what you can afford for a house payment. You then figure for every $100,000 you borrow, your payment will be the current interest rate times the number of $100,000’s. Example: You are borrowing $ 200,000 and the interest rate is 6%. For every $100,000 of debt your payment would be $600. If you borrowed $200,000, your payment would be $1200. ($150,000 $900)

If this calculation is confusing, or you may have questions that are not answered herein, you can of course call one of the fine lender links attached. There are calculators available through their sites as well.

Just a closing reminder to these calculations, remember the price of homes you can afford is figured “after” a down payment is added from your homes purchase price. Example: If you were buying a $200,000 home with 10% down, you loan amount would be $180,000. This is the number in which you have to qualify. You will also have to consider you will need closing costs and points if any. Ask your lender how much these may amount to in your specific situation.