Decide how much you can afford for a house before you shop for it, not later. Many hopeful home buyers fail to do this and spend countless hours looking at houses that are way out of their price range.
If you understand how lenders determine the mortgage you can afford by looking at your income, amount of deposit and total closing costs, you will have a better concept of this. What your expenses are and will be is another important component in this determination since the bank will want to make sure you can cover the monthly payment after these other expenses.
Most lenders will have a ratio that factors income, current debt and financial commitments, interest rate and closing costs to estimate how much a borrower can manage.
You can do these calculations yourself, or you can ask for the aid of a mortgage broker to do them for you.
In many cases, having a sufficient deposit is the hardest part of home ownership. Many people today are not able to put up some funds to accumulate the required funds for a decent down payment. Banks are no longer offering the dangerous no down payment loans now that credit is tight and they have to be more discriminating.
A minimum of a 10% deposit will typically be required. So, if you are looking in the $200,000 price range, you have to have $20,000 on hand, plus a reasonable amount for closing costs. Lenders will be pleased to give you an estimate of your closing costs.
A very low assumption would be that you have to make $25,000 available. Now you have to look at what you can afford for a monthly basis. There are mortgage affordability calculators on the internet, or you can ask a mortgage professional to do these calculations for you.
As a rule, lenders do not want to see your total cost of housing (mortgage, taxes and insurance) higher than 25% of your income. High credit card debt will have an effect on your disposable income, remember. The balance of your income above 25% should be devoted to food, utilities, savings, education and entertainment. A high credit card debt means that you will have that much less available for your basic needs.
Without these complications, you can count that a monthly income of $6,000 means that you can manage $1,500 in mortgage, taxes and insurance. Now you have some numbers in hand to begin shopping for a home.
