Determining what you can afford when buying a house can be quite a confusing time. It is also the most important part of becoming a homeowner. There are several things to keep in mind when making the final decision on the amount of home you can purchase.
You can call any lender, bank, or mortgage broker and ask them to determine how much you can afford. They will pull your credit and collect your W2’s and a pay stub. After running some elementary figures, they will tell you what you can afford. Every time, the number they give you is wrong. First, lenders figure what is called your debt to income ratio, using your gross income. Most lenders allow up to a fifty percent debt to income ration, which means fifty percent of your gross income can be used to pay debts. But, lenders only take into account the debts that report to your credit bureau, child or spousal support, and your proposed housing payment which includes your property taxes and homeowners insurance. Therefore, all of your other expenditures, such as, utility bills, day care costs, entertainment, groceries, clothing, and many other monthly debts are not included in the figures, but they are still debts that must be paid.
To figure out the amount of house you for which you qualify, the easiest way is to start with your budget. First, add up all of your monthly expenditures. From the phone bill, your daughter’s ballet class, to that must have cup of Starbuck’s in the morning. You can review your past 3 months bank statements to get an accurate view of what you spend on a regular basis. Remember, cash withdraws are expenditures! Next, add your net income. If you receive child or spousal support or other non taxable income, you can choose to add that into the equation or leave it out, depending on if you wish to use that income to qualify for your new home. You must be able to prove that your supplemental income will continue for at least two years in order to use it. Lender loan qualifications don’t take into account your payroll taxes, retirement savings or health insurance benefits which is why you should use your net pay. That is the actual amount of money that you deposit and have available to spend. Now, you subtract your monthly expenditures from your net income. The result is your disposable income. Now, you can add your entire rent payment into your disposable income. You won’t be paying rent once you are a homeowner. Now, divide this number in half. This is the payment that you can truly afford, leaving room for your current lifestyle and debts, as well as a monthly cash reserver for emergencies and additional savings. Remember, home ownership doesn’t include a maintenance man that is on call for free! Using the above method, you have a monthly cushion.
When you call to get pre-qualified for a home loan, you can tell your mortgage professional how much you can afford, rather than having him tell you. Keep in mind, whether your mortgage person works for a bank, a lender, or a broker, they are all sales people and are taught to sell you products based off of the guidelines they are given. Only you know how much you can truly afford. Tell your mortgage person that you would like your payment to include your property taxes and insurance.
Making sure that you buy what you can afford is the most important part of buying a home. Your house is probably the biggest investment of your life, make sure you can keep it by buying withing your range.