Want to know if you can afford to buy a house before you go to the Bank? There are guidelines lending institutions use to determine what you can afford when buying a house called debt to income ratios. There are also some other factors you will want to look at before taking the plunge into home ownership to make sure you don’t regret the decision later on.
Lets look at debt to income ratio. Your debt to income ratio is a simple way of showing what percentage of your income is available for a mortgage payment after all other monthly obligations are met. The ratio is one of the many things a lender considers before approving your home loan.
Debt to Income:
Yearly Gross Income = $50,000 / Divided by 12 = $4167 per month income
$4167 Monthly Income x .28 = $1166 allowed for housing expense
$4167 Monthly Income x .36 = $1500 allowed for housing expense plus recurring debt.
Not All Loans Are the Same
FHA loan ratios are generally 29/41, allowing a higher debt load for both housing expenses and recurring debt.
FHA would allow $1208 for housing and $2050 for housing plus recurring debt.
For a VA loan, the debt to income ratio should not exceed 41% of your monthly gross income.
The following things are considered part of the housing expense:
payments on loan principal and interest
private mortgage insurance
hazard insurance
property taxes
homeownership association fees (if any)
Recurring debt consists of:
credit card payments
child support
car loans
signature or student loans
medical bills
other debt that will not be paid off in 6-10 months
Some other expenses that you need to look at would be:
utilities (water, gas, electric, trash removal, cable and Internet)
extra commute time or fuel expenses
repair costs or cost of improvement you would like to make to the house
what additional furnishing you will need for your new home
When trying to determine if you can afford to buy a house, keep in mind the tax advantages associated with home ownership. Mortgage interest is almost always 100% tax deductible so are real estate taxes.
One of the drawbacks of a home ownership for some people is maintenance issues. Some people don’t have the time or ability to deal with lawn care or minor repairs, but still want something they can consider an investment and that will give them tax benefits.
These people can consider purchasing a condo or a home in an area where they have association fees that cover the cost of providing lawn care and minor maintenance as part of their membership. For some people the convenience of these services, plus the fact that they don’t have to invest the time or money in doing their own lawn care is well worth the expense and sometimes cheaper.
One thing you want to a void is buying a home and having the house payment and other related expensing be overwhelming to you. Just because it looks good on paper doesn’t mean it actually fits into your budget. When figuring how much you can actually afford to pay each month for a home don’t forget such expenses as:
eating out
entertaining
regular recreational expenses
groceries
fuel
clothing
cell phone bill
Vacations
Savings and retirement planning
Making the decision to purchase a new home can be an exciting adventure or it can be a nightmare, depending on how well you do you homework. Just because your rent payment and the mortgage payment for a home are going to be the same doesn’t mean your other expenses will be the same also.
When you can make an informed decision, about weather you can afford to buy a home or not, you will be more satisfied with that decision in the long run.