How Much Can I Afford?
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Know what you can afford is the first rule of home buying, and that depends on how much income and how much debt you have. In general, lenders don’t want borrowers to spend more than 28 percent of their gross income per month on a mortgage payment or more than 36 percent on debts.
It pays to check with several lenders before you start searching for a home. Most will be happy to roughly calculate what you can afford and pre-qualify you for a loan. Visit for kdcapmtg.com more Financial tools and advice.
The price you can afford to pay for a home will depend on six factors
- gross income
- the amount of cash you have available for the down payment, closing costs and cash reserves required by the lender
- your outstanding debts
- your credit history
- the type of mortgage you select
- current interest rates
Another number lenders use to evaluate how much you can afford is the housing expense-to-income ratio. It is determined by calculating your projected monthly housing expense, which consists of the principal and interest payment on your new home loan, property taxes and hazard insurance (or PITI as it is known). If you have to pay monthly homeowners association dues and/or private mortgage insurance, this also will be added to your PITI.
This ratio should fall between 28 to 33 percent, although some lenders will go higher under certain circumstances. Your total debt-to-income ratio should be in the 34 to 38 percent range.
What is Fannie Mae’s low-down program?
Fannie Mae is expanding the availability of low-down-payment loans in an effort to help more people nationwide qualify for a mortgage.
Two new programs will help potential buyers overcome two of the most common obstacles to home ownership, low savings and a modest income.
To address many first-time buyers’ struggles to save the down payment, Fannie Mae developed Fannie 97. The program provides 97 percent financing on a fixed-rate mortgage with either a 25- or 30-year loan term through Fannie Mae’s Community Home Buyers Program.
Fannie Mae’s new Start-Up Mortgage will assist buyers with a 5 percent down payment who are at any income level. Yet applicants do not need as much income to qualify and less cash for closing than with traditional mortgages. Borrowers will receive a 30-year, fixed-rate mortgage with a first-year monthly payment that is lower than the standard fixed-rate loan.
Freddie Mac, Fannie Mae’s counterpart, also offers low-down-payment loan programs.
What is the standard debt-to-income ratio?
A standard ratio used by lenders limits the mortgage payment to 28 percent of the borrower’s gross income and the mortgage payment, combined with all other debts, to 36 percent of the total.
The fact that some loan applicants are accustomed to spending 40 percent of their monthly income on rent — and still promptly make the payment each time — has prompted some lenders to broaden their acceptable mortgage payment amount when considered as a percentage of the applicant’s income.
Other real estate experts tell borrowers facing rejection to compensate for negative factors by saving up a larger down payment. Mortgage loans requiring little or no outside documentation often can be obtained with down payments of 25 percent or more of the purchase price.
When is the best time to buy?
Here are some frequently cited reasons for buying a house:
- You need a tax break. The mortgage interest deduction can make home ownership very appealing.
- You are not counting on price appreciation in the short term.
- You can afford the monthly payments.
- You plan to stay in the house long enough for the appreciation to cover your transaction costs. The costs of buying and selling a home include real estate commissions, lender fees and closing costs that can amount to more than 10 percent of the sales price.
- You prefer to be an owner rather than a renter.
- You can handle the maintenance expenses and headaches.
- You are not greatly concerned by dips in home values.