Despite the current economic condition, many people still believes that it is good to purchase a home. About 83% of Americans believe so, according to the National Housing Pulse Survey of 2009. If this is the percentage of people, who believes home buying is a good decision, why is the real estate market still slow? This is because there are many financial hindrances in home buying right now and one of them is the down payment and cost of closing.
However, down payment and cost of closing are not the only hindrances in the real world. For some people, it may include the monthly mortgage payments and other housing expenses that will be added on top of their usual expenses. If you look into these items closely, you will most likely define how much house you can afford.
Knowing what you can afford is one of the most common considerations in home buying. This is actually the first thing that comes into a homebuyer’s mind. It is a great concern for everybody. This is because each homebuyer is now awakened to the reality that a miscalculation of what they can afford could mean losing their homes. Many people can even lose their homes just by failing to anticipate or quantify the risk involved in financing. And this is exactly the root cause why many people have lost their homes from 2006 until now.
Again, how much house can you afford? To help you determine this here is a work back equation that will give you an idea on what you can spend.
1. Add all your monthly earnings.
2. Add all you monthly expenses. Do a separate addition of all your current debts.
3. Calculate your debt to income ratio. This is done by dividing your total earnings from your total current debts. The percentage should not exceed 36%.
4. Multiply the 36% maximum limit for DTI with your income. The result is a quantification of the total value of debt, which is allowable for your earnings.
5. From the total value of debt, deduct your monthly expenses and your current debts. The difference can be identified as the allowable amount for monthly mortgage.
6. The allowable amount for monthly mortgage can then be multiplied by the expected number of years that you plan to pay back a loan. Make an estimation whether it is 30, 15, 10 years. The result is a rough estimate of your possible PITI (principal, interest, tax and insurance) or simply your overall mortgage value.
7. Consider the amount for closing cost in your area. You can research the value on line to get an estimate. Then consider your down payment. Can you afford to pay upfront a 20% down payment? Look into your available funds and check whether you have enough. To have a better visual, a $200,000 home is expected to have a $40,000 down payment. Then check your available funds get an estimate of the upfront cost you can afford.
8. Then add them up to the mortgage value you have calculated in step 6. More or less, this could be a rough estimate of the purchase price you can afford (as opposed to your income).
Remember, closing cost can be very expensive. And mortgage can also have fluctuating rates (unless you opt for fixed rate). Therefore, you have to be prepared for all of these costs. If you have no savings or if right now, you feel that you are having financial difficulties, hold back on buying. Clearly, your current income cannot support the cost of home buying. However, the equation above is already a conservative approach. As you can see, only 36% of your income is allotted for your usual expenses and other debts. Therefore, you can always play with the numbers to increase your allotment for housing. What is important is that you can still maintain the quality of lifestyle and still get savings, despite the additional housing expense. And this pretty much tells you how much house you can afford.
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