Wednesday, February 17, 2016 / by Bill Berning*
So you want to buy a home…how do you know what you can afford and what might be way over your head?
The last thing you want is to fall in love with a house that is out of your budget – find out what you can really make work financially and then stick to it so that you end up happy with your purchase years down the road.
The amount you can afford to pay for a mortgage will be determined by the amount of income you earn, and the amount of debt that you have to pay each month. That will tell you exactly how much discretionary money you have to spend on housing requirements, without putting yourself in a dangerous financial position. At the same time it will give you a good range that you can use to help limit the properties that you consider when looking to buy a new home.
What Are The Guidelines?
Generally speaking, lender guidelines state that (Gross Debt Service Ratio) should be no more than 35% of a person or family's total income. You can determine that number by taking your housing costs and dividing it by your gross income. The percentage should be less than 35%. Then there is also another calculation called Total Debt Service, where the bank wants to ensure all of your debt including your housing costs, doesn’t exceed 42%. This is calculated by taking all of your debt plus your housing cost and dividing by your gross income.
Basically, the more debt that you have, the less money you can afford to pay for housing and a monthly mortgage. Debt can come from a number of things, including loans, leases on automobiles or equipment, outstanding credit card bills, etc.
Another issue that compounds the complexity of mortgage payments is that they can fluctuate once your term is over, sometimes quite wildly depending on the market. At the same time the housing market itself can also vary, making the payments that you will owe based largely on the time that you choose to purchase the property. If mortgage rates are low and housing costs have plummeted you can usually get a much lower monthly payment then you can during a boom.
Does My Credit Score Really Matter?
Your credit score will also have an impact on how high your mortgage rates, and can even affect whether you are able to get a mortgage at all. Before you even start to look at homes you should get a credit report for yourself and or your spouse, to see what lending institutions think of your level of risk.
According to Angela Colley of Realtor.com “Generally, if you have a steady job and a high credit score, you’ll qualify for the best rates, but if you have a few blemishes on your credit report, you’re considered to be a higher risk and may only qualify for a higher interest rate. Different lenders may also offer you different interest rates.”
The process of cleaning up your credit score in order to secure a mortgage or get better rates can be difficult, costly, and time consuming. If you have old outstanding bills then those need to be paid off, and the institutions claiming them will have to report that they have been cleared. You can also have a low rating due to not using enough credit, which may precipitate the need to apply for credit cards, which can be used and immediately paid off. “
Added Costs Make A Difference
There are also other major costs associated with home ownership that go beyond the mortgage, which should factor into your decision making process. If the house is a fixer upper than you may need to hire a contractor, or at least purchase supplies to enact repairs to the structure of the building. This is especially true if there are dangerous issues that can be life threatening over time.
Many people also ignore the monthly maintenance costs associated with owning a home. Minor repairs will be a constant issue, with some problems only getting worse and more expensive over time. There are also utility bills, as well as incidental costs that can arise from large-scale damage due to fire, flood, or natural disasters. All of these things should be considered when thinking about the long-term costs of owning and living in a home.
Don’t Forget The Down Payment
Once your mortgage limit has been determined, and you’ve factored in the long-term costs of living there, you will have to come up with a down payment. This may come from your own savings, or in some cases it may be possible to borrow money from friends and relatives, although that can cause a social strain.
One of the major problems that people run into when purchasing a home is that it can be a very emotional process. It’s easy to fall in love with a particular property, or neighborhood, and become desperate to obtain it. At the same time it can almost be like a game, where the winner gets a nice big new house to live in. However it is vital that you stick to your budget and use logic to make this incredibly important decision. That way you won’t come to regret the debt and stress that you have unnecessarily piled on yourself.
While it is important to find a home that you are comfortable with, you don’t want to sacrifice your financial security or that of your family. By understanding exactly how much you can afford to pay for a mortgage each month, as well as the other incidental payments that will be required, you can make a sound plan that will allow you to live a comfortable and stress free life. At the same time you won’t have the constant worry of losing your home if you miss a payment looming over your head.