Four questions every home buyer needs to ask
Before house shopping begins, smart consumers in the market for a new home evaluate how much mortgage they can realistically afford. This often involves reconciling personal wants and needs with fiscal reality. In order to determine how much house you can afford, here are four questions to ask yourself.
How much housing expense can I afford? Housing expense is the combined cost of property tax, principal, interest, homeowners insurance and private mortgage insurance. Additionally, how high of a mortgage payment can I afford? To arrive at the answer to this second question, consider other monthly financial obligations your haveobligations like auto loans, credit card debt, and student and other types of personal loans. Thirdly, how much of a down payment do you plan to have saved by the time escrow rolls around? And fourthly, how much money are you comfortable spending on a house?
Be prepared to spend 1/3 of your income on housing expenses
How much money should you be willing to allocate towards housing expenses? The answer to that question tends to vary from personal budget to personal budget. The average American homeowner spends slightly less than a third of his or her paycheck on housing expensesroughly 28% to 33%. While this seems like a significant portion of monthly income, its important to remember that this covers a variety of costs associated with homeownership: homeowners insurance, property taxes, principal and interest.
Mortgage payments and total debt expenditure
Total monthly debt expenditure consists of mortgage and other housing expenses in addition to monthly car loan payments, credit card bills and payments for other kinds of loans you may have accumulated over the years. Most lending institutions recommend that the total monthly expenditure on total debt be no higher than 36% to 38%.
Down Payment
How much money should a prospective homeowner save before seriously searching for a home? Most lenders prefer that a mortgage applicant put down at least 20% of the cost of the total loan. Depending on your credit history, credit score, salary and house/debt ratio, you may be able to find a lending institution willing to offer you a mortgage with less than a 20% down payment. Otherwise, expect to pay 20%.
Comfort level
Comfort level is a personal value. It varies from individual to individual because there is really no wrong or correct response. To respond to this question, ask yourself, How much is a house worth to me compared to all the other objects and relationships in my life? How much of my disposable income am I willing to invest in real estate equity as opposed to travel, entertainment, charity, personal savings, transportation, health care, retirement funds or higher education?
Additional Resources
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[Source: Mortgage Blog]
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