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How Much Can I Afford
Introduction You've decided you definitely want to buy a house and you're trying to figure out how much you can afford. As strange as it may seem, the money a financial institution will lend you and how much you can truly afford may be two completely different amounts. Sure, it feels great to hear a lender say you can have the money to buy that expensive house in a neighborhood you've always admired. Two years later though, when you realize all of your money goes into the house with nothing left over, that good feeling will fade. When comparing mortgage payments with what you currently pay for rent, make sure you include the other costs that go along with home ownership. Expenses such as the cost of moving, immediate repairs, taxes, insurance, and ongoing maintenance can add up to more than you're currently spending on rent. Are you already feeling a pinch at the end of the month? Are the ongoing expenses of a home owner something you can really afford? Give these questions a lot of thought and good honest answers. Finally, before you grab a map of the area and drive off to look for homes, make sure you've also been pre-approved for a loan at 1st Source Bank. With a pre-approval, you'll know what houses are in your price range and which ones aren't. Failure to get pre-approved is a mistake many first time homebuyers make that often causes unnecessary headaches. What are ratios? When you apply for a mortgage the lender will look at your entire financial picture to determine how much money they will let you borrow. Lenders use income and debt ratios to determine how much you will be able to borrow. Ratios are nothing more than comparing your income against the amount of debts you owe. They'll use several guidelines including one called the Debt-to-Income Ratio. This ratio compares your total debt to your total gross income (including your spouse's) and is important when determining someone's ability to repay a loan. Generally, no more than 28% of your gross income (income before taxes) should be used for housing expenses and no more than 36% should be used for your total debt. Total debt includes your mortgage plus any auto loans, credit cards, and loans of any other kind. For example, if 20% of your total gross income already goes to pay your current debt, 16% of your gross income is the maximum most institutions will lend you to buy a house. Again, this is a guideline and actual percentages may vary a little depending on a home buyer's circumstances. Another ratio lenders look at is the Loan-to-Value Ratio (LTV). This ratio is calculated based on the value of the home compared with the mortgage amount. The down payment you have will impact the LTV ratio. How Much Downpayment Do I Need? An important component in determining how much you can afford to pay for a house is the down payment, which usually comprises 20% of the total cost. Purchasing a home that is selling for $98,000, for example, would require a down payment of $19,600. If you don't have 20% down, don't give up. There are many ways to accomplish your goal. Today many lenders realize how difficult it can be to come up with such a large sum of cash, and will help some buyers take advantage of special loan programs. If you qualify, VA loans are often made with no down payment, and FHA loans can require a down payment as low as 3% of the purchase price. If you don't qualify for a VA or FHA loan and you are unable to pay 20% up front, one alternative is Private Mortgage Insurance (PMI) which can reduce your down payment dramatically. PMI protects the lender in the event the buyer defaults on the loan. The cost of this insurance will be added to closing costs and your monthly payment. Because mortgage insurance adds to your overall monthly payments, it reduces your 28/36 ratio and effectively reduces the amount you will be able to borrow. To avoid paying PMI, many young people purchasing their first house get help
from their family for the down payment in the form of a monetary gift. This
is acceptable, however you must produce a letter from your benefactor stating
that the money is, in fact, a gift and no repayment required. But if this isn't
an option, you still won't have to pay PMI forever. Once you've sent in enough
payments that the principal payed and down payment together reach 20% equity,
you should no longer be required to pay for Private Mortgage Insurance. So it's
to your advantage to pay as much as you can, as often as you can, above and
beyond your minimum payment. If you're interested in finding out what you can afford, our Mortgage Qualification Calculator will provide an estimate of what you can spend on a home. How To Increase Your Borrowing Power If you are disappointed with the amount of money you're able to borrow, it's possible that you'll have to come to terms with buying a less expensive home. Before you do though, consider some options that can increase your borrowing power.
You can discuss your special needs and obtain straight talk and sound advice when you contact the mortgage professionals at 1st Source Bank. We will work with you to understand your options and guide you through the entire home buying process. Other Calculators To help you determine how much money you will be able to borrow, 1st Source Bank provides several calculators to make the task quick and easy. Just choose one or more of the options listed below. With the click of a mouse, you'll be connected with a calculator that will aid you in establishing how much you can afford to borrow.
Remember that the amount of money you are able to borrow and the amount you can comfortably afford may be two very different figures. Making sacrifices to purchase a house is well worth the effort, however discovering that you've become "house poor" because you can afford nothing else is a situation you may soon come to regret. Only you know the kind of lifestyle you want to maintain and how much that will change when you purchase a home. |
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