Before you even consider about shopping for a home, you should decide how much you can afford to pay for it. Many prospective home buyers fail to do this and spend countless hours looking at houses that are way out of their affordable 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 market rates and closing costs on mortgages in your area. Total expenses will be examined by the lender to make sure you will be able to pay down the loan they are giving you.
Most banks will have a ratio that factors income, current debt and financial obligations, interest rate and closing costs to figure how much a borrower can afford.
It is possible to calculate these costs on a worksheet, or you can get in touch with a mortgage professional who will be happy to make the calculations for you.
In most cases, having enough down payment is the most difficult part of home ownership. We are simply not in a savings oriented society and many have a hard time saving that elusive next egg. The days of no down payment loans are now behind us since the credit crisis in the home mortgage market, so most people will have to count on saving a large amount for their down payment.
Figure at least a 10% down payment as a necessity for most lenders. For a home that costs $200,000, which is an average price today, you will have to have saved at least $20,000, plus whatever amount you may need for closing costs. Lenders will be happy to give you an estimate of the closing costs.
Five thousand dollars is probably a fair estimate of how much you will need for closing costs, so be prepared to have $25,000 in the bank. Now the lender will ask whether you can afford the monthly payments. There are home loan affordability calculators on the net, or you can ask a mortgage professional to do these calculations for you.
Typically, the standard used is that your home costs should not be more than 25% of your income. However, if you have inflated credit card debt, this will affect this percentage. They have to make sure you have enough money to pay the mortgage after you have paid for your food, utilities, education and like expenses. A high credit card debt will mean that you will have that much less to use for your basic needs.
Without these additional issues, figure that a monthly income of $6,000 means that you can manage $1,500 in mortgage, taxes and insurance. This is the smartest way to shop for a home, once you really know how much you can afford.
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