One of the most important items to determine BEFORE you go shopping for a new home is what you can afford to pay for it. Many hopeful home buyers fail to do this and spend countless hours looking at homes that are way out of their price range.
There are a number of factors that determine how much you can spend on a home, including household income, the amount of the deposit, and the interest rates and closing costs on home loans in your area. Lenders will also examine 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 home loan.
There are some rule of thumb ratios that most lenders use to take into account your income and expenses, debt ratios and closing costs, to determine what you can afford to pay for a home.
You can do these calculations yourself, or you can enlist the aid of a mortgage broker to do them for you.
For most people, affording the down payment is the biggest barrier to buying a home. Today, people don?t put aside a fixed amount of money into a savings account to save up for something. No down payment loans are rarely granted today days, since they were such a big part of the mortgage problems over the last few years.
Figure at least a 10% down payment as a requirement for most lenders. If the home you are looking for is in the range of $200,000, you will need $20,000 for a down payment and more funds for closing costs. Lenders will be happy to give you an estimate of your closing costs.
Five thousand dollars is probably a fair estimate of how much you will need for closing costs, so be ready to have $25,000 saved up. Will you also afford the mortgage payments? You can visit many sites on the internet that will help you estimate what you can afford in a monthly home loan, or you can call a mortgage professional.
Typically, the standard used is that your housing costs should not exceed 25% of your income. Banks will examine this closely, more so if you have high credit card debt. If you are spending 25% of your income on your home, the rest is (in a perfect world) expected to be spent on utilities, food, entertainment, education and savings. If you have heavy credit card debt that has to be serviced, that will be deducted from your income when the bank is calculating what you can afford.
If you net $6,000 a month, you can manage a mortgage payment of about $1,500 (25%), barring any other large, standing expenses. With this information at hand, you can now really start to shop for a house.
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