Make Sure You Know How Much House You Can Afford
Decide how much you can afford for a house before you shop for it, not after. This will save you umpteen hours looking at homes 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 deposit and total closing costs, you will have a better idea. Lenders will also look at your current debt and fixed expenses, since you will have to continue to pay such bills and they want to make sure you have enough income left to pay the mortgage.
To do this, banks use certain ratios that tell them what you will be able to afford, ratios based on income, expenses, debt, down payment and closing costs.
It is possible to calculate these costs on a worksheet, or you can contact a mortgage professional who will be happy to do it for you.
In most cases, having enough deposit is the most difficult part of home ownership. Today, people don?t put aside a fixed amount of money into a savings account to save up for something. Lenders are no longer offering the dangerous no down payment mortgages now that credit is tight and they have to be more discriminating.
A minimum of a 10% deposit will typically be required. This means that for an average priced home of $200,000, you will have to have the minimum amount of $20,000 for the down payment, and the extra funds for closing costs. A lender can supply you with a good faith estimate of your closing expenses.
A very low assumption should be that you have to make $25,000 available. Will you also afford the mortgage payments? There are home loan affordability calculators on the internet, or you can ask a mortgage consultant to do these calculations for you.
The standard rule of thumb is that your mortgae costs should not exceed 25% of your income. High credit card debt will have an effect on your disposable income, however. The bank expects you to use the balance after the 25% for such items as clothing, utilities, education and savings, not high minimum payments on a card. A high credit card debt will mean that you will have that much less to use for your basic needs.
If you net $6,000 a month, you can afford a mortgage payment of about $1,500 (25%), barring any other large, fixed expenses. Now you have some figures in hand to begin looking for a home.
