disneyofcourse
DIS Veteran
- Joined
- Oct 2, 2006
Isn't there some kind of equation?
This has been hinted at, but you need to be clear that "How much can I afford?" and "How much will I be allowed to borrow?" are two totally different questions. Lenders can be quite predatory and will happily lend you far more than you can actually afford. You should run all the numbers yourself before your first meeting with the mortgage broker. Then don't allow the broker to talk you into any more than you've already determined you can afford.
I believe the rules of thumb used to be that housing should be no more than 28% of income and total debt shouldn't exceed 36% of income.
The other rule is that the purchase price should not be more than 2.5 to 3 times your income (I think that's what ducklite meant - not 2.5% of income).
In recent years, many buyers and lenders alike have been ignoring these rules. People have been buying far too much house for their income and lenders have been making loans that are quite irresponsible, which is part of the reason the foreclosure rate has been rapidly rising.
Absoutely! I certainly didn't mean to imply that they were. No offense intended.I must say that not all lenders are predatory.
Another piece to this puzzle is income. People who have upper level incomes can generally stretch the debt-to-income ratios, as they've got more disposable income.
A person making $40K a year buying a home worth $120K is genrally going to have a much more difficult time making ends meet than a person making $300K buying a home worth $900K. While certainly some costs--such as insurance and taxes--will be higher, controllable expenses such as clothing, food, and transportation can be fixed at the same point for both buyers, leaving the higher income buyer a lot more "wiggle room" in the budget.
Anne
Well, in figuring out my two home purchases, I worked backwards.
I picked a monthly payment that I figured I could handle, subtracted the taxes and insurance I was likely to pay, and what was left was the mortgage payment. I pluged that into a mortgage calculator a long with the interest rate I figured I could qualify for (I have excellent credit), which told me what my loan amount would be. I added in my down payment amount, and that was the home price I could afford. In my case, the trick was finding a home in my price range, not easy in my area!
Now, to figure out what I felt I could afford a month meant that I had to write out a budget and track my monthly expenses, not forgeting bills that crop up once or twic a year. So that should be your first step. And try to base the budget on living in your new home, that can be tough since utilies can vary so much. Factor in your new commute to work, are you going to spend more on gasoline, or less?
Another factor is your down payment. If you have 30K saved, you most likely won't want to put the full 30k down, maybe only put down 25k, leaving 5k in savings. You'll need some cash on hand for moving expenses, items for the new house (do you have any idea how many runs to Target I made the week before and after my last move? Me either, because I lost count after trip #8!) deposits on new utilities, minor home repairs, eating out while the kitchen is still packed up, well, you get the idea. Put all of your savings towards the house and you have no cushion towards expenses like these, or any other emergency that comes along about the same time.
This is a very good point and something to keep in mind when looking at houses. For example, when we bought our home it was 30 years old. It still had the original furnace and central AC, so we knew those would need replacing in the short term. The roof was at the end of its useful life, so we knew we'd be putting a new one on soon. The house had the original windows and siding. Stuff like that. The advantage to those things, though, is we got the house cheaper than comparables in the neighborhood which had already been upgraded. That kept our mortgage amount lower and we were able to repair/replace things as the need arose and funds became available.We also spoke to other homeowners to find out unexpeced expenses for the age house we planned to purchase
This is a very good point and something to keep in mind when looking at houses. For example, when we bought our home it was 30 years old. It still had the original furnace and central AC, so we knew those would need replacing in the short term. The roof was at the end of its useful life, so we knew we'd be putting a new one on soon. The house had the original windows and siding. Stuff like that. The advantage to those things, though, is we got the house cheaper than comparables in the neighborhood which had already been upgraded. That kept our mortgage amount lower and we were able to repair/replace things as the need arose and funds became available.
A couple of other things to keep in mind, depending on the home, you might need to spend money immediately on things like window coverings. Even the least expensive cut to fit blinds from Home Depot could end up costing hundreds. And if you've got large or odd sized windows, even basic blinds could run you over $1000.
Both times we've bought homes we've spent $1000 or more at Home Depot and Target in the first week or so we were there. Lawn care items, garbage cans, paint, hoses, ladders, it all adds up quickly.
Be sure to have enough cash after you close to pay for things like this.
Anne