Understanding What You Can Afford for a Home

One of the most important items to determine BEFORE you go shopping for a new home is how much you can afford to pay for it. This will save you umpteen hours looking at homes that you should not really be in the market for in the first place.

It is critical to understand what lenders will use to determine what you can afford, such as your total income, how much you are putting down, what the closing costs will be, etc. Total expenses will be examined by the bank to make sure you will be able to pay down the loan they are giving you.

To do this, banks use certain ratios that tell them what you will be able to afford, ratios calculated on income, expenses, debt, down payment and closing costs.

It is possible to calculate these costs on a worksheet, or you can get in touch with a mortgage broker who will be happy to make the calculations for you.

One of the largest stumbling blocks to home ownership is the deposit. Today, people don?t put aside a fixed amount of money into a savings account to save up for something. Banks are no longer offering the dangerous no down payment mortgages now that credit is tight and they have to be more discriminating.

Usually, you won?t be able to close on a home loan without at least a 10% deposit. For a house 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. A bank can easily give you an estimate of closing costs.

A very low assumption should be that you have to make $25,000 available. Now the lender will ask whether you can afford the monthly payments. You can look at many sites on the internet that will help you estimate what you can afford in a monthly home loan, or you can call a mortgage professional.

The standard rule of thumb is that your mortgae costs should not exceed 25% of your income. Banks will examine this closely, more so if you have high credit card debt. They have to make sure you have adequate funds to pay the mortgage after you have paid for your food, utilities, education and like expenses. A high credit card debt means that you will have that much less to use for your basic needs.

If your income is $6,000 per month, this rule of thumb means that you can afford $1,500 per month for your mortgage. This is at least a starting point for a shopping trip for a new house.