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Understanding What You Can Pay for a House
Before you even think about shopping for a home, you should determine how much you are able to afford to pay for it. Sadly, most borrowers have no idea how much they can afford to pay for a house and end up wasting their time looking at homes that they find, once they apply for a home loan, are way out of their price range.
If you understand how lenders determine the mortgage you can afford by examining your income, amount of deposit and total closing costs, you will have a better concept of this. Your total expenses will also be considerd, since they will have an effect on how much income you have left to pay your home loan each month.
Most lenders will have a ratio that takes into account income, current debt and financial obligations, interest rate and closing costs to estimate how much a borrower can afford.
You can do these calculations yourself, or you can ask for the aid of a mortgage consultant to do them for you.
For most people, saving for the down payment is the biggest barrier to purchasing a home. Many people new are not able to put aside some savings to accumulate the required funds for a decent down payment. Banks are no longer offering the dangerous no down payment loans now that credit is tight and they have to be more careful.
Assume at least a 10% down payment to buy a house. For a house that costs $200,000, which is an average price today, you will have to have saved at least $20,000, plus whatever funds you may need for closing costs. You can request an estimate of closing costs from your lender.
So let us suppose that you need $25,000 to start looking for a house. Now you have to look at what you can afford to pay on a monthly basis. There are sites on the internet that can help determine how much you can afford per month once you enter all income and debt, or just speak to your mortgage professional.
As a rule, lenders do not want to see your total cost of housing (mortgage, taxes and insurance) more than 25% of your income. However, if you have inflated credit card debt, this will affect this rate. The remainder of your income above 25% should be used for clothing, utilities, savings, education and entertainment. If you are spending a lot on credit card debt, your income will be reduced, because you will have less funds to devote to the mortgage.
Barring high credit card balances, you can figure that if you earn $6,000 a month, you can afford to pay $1,500 for the home loan, taxes and insurance. Now you have some numbers in hand to begin looking for a home.
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