Decide how much you can afford for a house before you shop for it, not after. It is a sad fact that most borrowers have no idea how much they can afford to pay for a home and end up wasting their time looking at homes that they find, once they apply for a home loan, are way out of their price range.
If you understand how banks determine the mortgage you can afford by looking at your income, amount of down payment and total closing costs, you will have a better concept of this. Lenders will also examine your current debt and fixed expenses, since you will have to continue to pay those and they want to make sure you have enough income left to pay the mortgage.
What you can afford to pay will be determined by ratios that are based on factors such as income and expense, outstanding debt, amount of deposit and closing costs.
It is possible to calculate these costs on a worksheet, or you can contact a mortgage professional who will be happy to make the calculations for you.
One of the biggest stumbling blocks to owning a home is the down payment. 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 these days, since they were such a big part of the mortgage problems over the last couple of years.
Assume at least a 10% deposit to buy a home. So, if you are shopping in the $200,000 price range, you have to have $20,000 on hand, plus a reasonable amount for closing costs. You can get an estimate of closing costs from your lender.
A very low assumption would be that you have to make $25,000 available. Now the bank will ask whether you can afford the monthly payments. You can visit many sites on the internet that will help you calculate what you can afford in a monthly home loan, or you can consult with a mortgage broker.
Typically, the standard used is that your housing costs should not be more than 25% of your income. Lenders will examine this closely, especially if you have high credit card debt. They have to make sure you have enough money to pay their loan after you have paid for your food, utilities, education and like expenses. Spending too much to pay for your credit card debt will leave less disposable income to pay your mortgage.
If your income is $6,000 per month, this rule of thumb means that you can pay $1,500 per month for your home loan. This is at least a starting point for a shopping trip for a new home.
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