How Much House Can You Afford?
5 Easy first steps to find out what price house you can afford
Finding what price house you can afford to buy can be a time-consuming process of calling on several lenders, collecting data on various current mortgage rates and reviewing your finances with several lending officers. Fortunately, there’s an easy way around all this. With a few simple steps, you can figure out for yourself the approximate mortgage amount a lender is apt to approve for you. That amount, plus the amount off your downpayment, gives you the price range of homes you are qualified to buy. In real estate we call this exercise “pre-qualification.” First, you need to find what interest rate is currently being charged for 30-year fixed rate loans. But, instead of phoning several lenders, you can simply give me a call. I make it my business to have the latest information on lenders’ rates and financing packages right at hand. Next, apply the following do-it-yourself system to zero in on the approximate mortgage amount lenders are likely to approve:
1. Calculate your gross monthly income-the amount you make before deductions. Add your spouse’s gross monthly income, if any.
2. Deduct from the total any monthly payments you make on long-term debts (more than 10 months), such as an auto loan or regular payments on furniture, appliances, school, alimony or child support.
3. Multiply the resulting figure by 30% (.36) to get your “income-to-debt ratio.” The answer will conform with generally accepted lenders standards of what borrowers can afford, after a downpayment of 10%. Some lenders and mortgage plans apply more or less strict factors; say 33% of 38%, especially when your downpayment is 5% or 20% respectively. Also many lenders will calculate a second “PITI ratio” figure, using 28% times gross monthly income without subtracting debts, to establish your qualified monthly payment range. Again, the percent factor without subtracting debts may vary; say 25% or 33%, under certain circumstances.
4. Take a “guesstimate” of average annual real estate taxes in your area, plus the annual cost of homeowner’s insurance. Divide by 12 to obtain a monthly figure. (On average, the monthly cost of these two items might be about one-tenth of 1% of the house purchase price. Ask me about your specific situation.)
5. Deduct the monthly taxes and insurance cost from both figures you arrived at in step 3. The result is the ballpark monthly payment on principal and interest you can afford to pay on a mortgage. With the amount of principal and interest (PI) payment you can make in hand, I calculate the amount of mortgage you can obtain, at various rates. Or you can find the approximate answer for yourself. I’d be happy to discuss the many alternative mortgage plans-besides the 30-year fixed rate-that can dramatically increase the home price you can afford.
Remember, the price range of homes you can afford is figured after a downpayment is added to your qualified loan amount. In addition, you’ll need to set aside an amount for closing costs and point payments. Ask me how much these may amount to in your specific situation.
What is P.I.T.I.?
Principle, Interest, Taxes, Insurance. These are the four elements that make up the usual monthly mortgage payment. These costs are often called “carrying charges” Although lenders qualify buyers also allocate income to meet maintenance, utility costs and any homeowner’s or condominium fees in addition.