How Much House Can I Afford?

Typically, home buyers are pleasantly surprised at how much they can borrow to purchase a home, particularly when mortgage rates are low. But in many real estate markets, even modest properties are priced well out of range of an average salary. Sometimes buyers find themselves having to borrow a little more than they feel comfortable to acquire a home in which they would like to live. In these cases, the ability to leverage a higher loan amount is crucial. Generally speaking, lenders (Banks, Savings & Loans, Mortgage Bankers, etc.) use a "rule of thumb" based on a 28%/36% ratio. The Principal, Interest, Tax(Real Estate), and Insurance (Homeowner's), or PITI payment, which is commonly referred to as the "Monthly Payment", cannot exceed 28% of the Applicant's gross (not "take-home") monthly income. The 36% ratio combines the 28% (PITI) ratio with the Applicant's additional current outstanding monthly indebtedness (Installment Debt and Revolving Credit Debt) primarily. In other words, as a home buyer your total indebtedness should not exceed 36% of gross monthly income. To illustrate this concept, let's assume that you have a gross yearly income of $48,000. This equals a gross monthly income in the amount of $4,000. Applying the 28% "rule of thumb", you would have $1,120.00 available for the (PITI) payment. Assuming real estate taxes are $75.00 per month and homeowner's insurance is $30.00 per month, that portion of your "Monthly Payment" which would be applicable to the Principal (P) and Interest (I) portion would be $1,015.00. If current fixed interest rates are 7.5% and the mortgage loan term is established at 30 years, the average cost of a house you can afford is $145,162.89 or $145,000 rounded to the nearest $1,000. (Your J.S. Walker Associates agent can help you calculate how much you can afford to borrow). This loan affordability would be applicable if the you had no additional monthly indebtedness or such indebtedness, added to the "Monthly Payment" amount, did not exceed the 36% overall maximum debt ratio. Assuming that you have $15,000 Available as a cash down payment, you should be looking for a home in the $160,000 range: Your ability to obtain financing is also contingent upon your good credit, in the form of a Credit Report Score which meets the Lender's underwriting guidelines. Making sure that all past and current bills have been and are being paid in a timely manner is crucial to maximizing your ability to obtain financing to purchase a home. In addition to the mortgage loan, down payment, and closing costs, a home buyer should also have a sufficient income for repairs and maintenance of the home, as well as sufficient cash reserves for any improvements in the immediate future. Your J. S. Walker Associates agent can assist you in identifying what type of financing is best suited to your home buying situation. We also work closely with all Lenders to assist you in becoming " Pre-Qualified" for your home purchase so that when you find your new home you are enabled to immediately move forward positively to acquire the "home of your dreams".