How Much House Can I Afford?
Wow, what a great question and hopefully I will give a equally great answer. There are so many variables that go into qualifying for a home loan it is hard to know where to start. Let me begin by getting something off my chest. I do have some beef with those payment calculators that are on most real estate sites. It makes my job really hard and undermines me as a professional when the calculator says that you can afford $200,000 and then I come along 5-minutes later and tell you "No..., actually you can only afford $100,000 because the calculator didn't account for tax, insurance or H.O.A. dues. Plus it was a interest only payment and not a 30-year-fixed payment." So please use with caution...or don't.
Some of the variables you need to take into account are: How much do you make, what type of loan are you comfortable with, how much can you put down, what's your credit look like, how many people are going to be on the loan, what kind of bills do you have right now, do you have a savings and it goes on and on this way for about 40 questions. The answers to each of these questions can completely change the loan product I would recommend for you, so the best answer to "How much house can I afford?" would be "SH**, I don't know go talk to a bank." I know this isn't the answer most of you are looking for so here are some quickie rules and guidelines that I use myself on the fly.
In most cases for every $10,000 you borrow you can expect to pay $83-per-month. (This is based on loan's under $400,000, 6.25% interest, 30-year-fixed payment, a tax rate of 1.1%, a small H.O.A. of $150 a month and/or insurance of .25%)
So if you came to me and said "Yo Brent, I got $3,000 I can spend on a house every month and $50,000 to put down, what can I get?" I would pull my fancy calculator out punch in 3000 divided by .83, times it by 100, and it would tell me $361,444. Then I would add your $50,000 on top and come up with $411,445. ((Payment/.83) x 100 = Loan Amount) this also works backwards ((Price/100) x .83 = Payment)
In a nut shell that's what you can afford, now qualifing for the loan is a completly seperate issue so here are some of the major qualifying factors in getting a loan,
1. Income Ratio's
- Your house payment cannot be more than 35% of your yearly gross income.
- Your total house payment and bills cannot be more than 50% of your gross.
2. Down Payment
- 3% down minimum if you are a first time buyer or have not bought a home in 2-years.
3. Credit Scores
- 680 minimum for most loans, obviously the better your credit the better the interest rate you can get. (750+ is tear 1)
4. Savings
- Most banks require you to have at least 3-months of payments in the bank as reserves.
In closing I recommend talking to your bank early and get this out of the way so you will know exactly what you can qualify for and have time to fix anything if you need to.
As always it was fun and blog you later,
Brent DeWitt
