Home Affordability
There are two ways to determine how much you can afford to spend on a
home. You can calculate a general estimate for what you may be able to
afford, or you can work with your banker, lender or realtor to be preapproved for a specific loan amount.
Here, you can make two estimates to help you investigate home
buying, check out the homes you can afford and plan for down payment.
You should be preapproved for a loan when you are serious about home
buying. Being preapproved tells you exactly what you can afford and helps
to speed up the buying process. It establishes stricter (or sometimes more
generous) limits on what homes you should be looking at.
Estimate 1: Calculate the total home cost you can afford
To calculate the total home cost you may be able to afford, multiply your
gross annual income by 3.5.
For example: |
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$50,000 X 3.5 = $175,000.
$75,000 X 3.5 = $262,500.
$100,000 X 3.5 = $350,000.
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This is a rough calculation of the amount you might qualify for, assuming a 20
percent down payment and that you do not have a lot of debt.
Estimate 2: Calculate the monthly mortgage payment you can afford
To calculate the monthly mortgage payment you may be able to afford,
multiply your gross monthly income by 0.38 and subtract your current
monthly debt payments. Debt payments include student loans, car payments, credit card and
other credit payments.
For example: |
Gross monthly income is $4,000 ($48,000. divided by 12)
Monthly debt: $750.
$4,000 X .38 = $1,520
$1,520 - $750. = a mortgage payment of $770
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The .38 ratio is used when you can make a 20 percent downpayment on your
home. With a downpayment below 20 percent of the purchase price, reduce the ratio to .33. As you can see, the amount of debt you have can greatly
reduce the maximum monthly payment you may qualify for. In addition to saving for
a monthly payment and closing costs, you may also need to reduce debt. (As a
general rule, you should pay down debts before saving for a down payment. This strategy
will also dramatically reduce your total interest costs.)
To see what kind of a home you can afford, check the current home listings.
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