One of the most important items to determine BEFORE you go shopping for a new home is what you can afford to pay for it. Many prospective home buyers fail to do this and spend countless hours looking at homes that are way out of their price range.
If you understand how banks determine the mortgage you can afford by looking at your income, amount of deposit and total closing costs, you will have a better idea. Total expenses will be examined by the lender to make sure you will be able to pay down the mortgage they are granting you.
What you can afford for the mortgage will be determined by ratios that are based on factors such as income and expense, outstanding debt, amount of deposit and closing costs.
It is possible to calculate these costs on a worksheet, or you can get in touch with a mortgage broker who will be happy to make the calculations for you.
One of the biggest stumbling blocks to owning a home is the deposit. Many people today are not able to put up some savings to accumulate the necessary funds for a decent down payment. We can forget about no down payment mortgages now that the credit crunch in the real estate market has forced lenders to be stricter about their terms.
Usually, you won?t be able to close on a home loan without at least a 10% deposit. If the home you are looking for is in the range of $200,000, you will need $20,000 for a down payment and more funds for closing costs. A lender can supply you with a good faith estimate of your closing expenses.
So let us figure that you need $25,000 to start shopping for a home. Now you have to look at what you can afford for a monthly mortgage. You can figure how much you can pay based on income and current expenses if you visit one of the many calculators available on the net, or you can take the easy route and speak to a mortgage consultant.
Typically, the standard used is that your housing costs should not be more than 25% of your income. High credit card debt will affect your disposable income, however. They have to make sure you have enough money to pay their loan after you have paid for your food, utilities, education and like expenses. If you have high credit card debt that has to be serviced, that will be deducted from your income when the lender is calculating what you can afford.
If your income is $6,000 per month, this rule of thumb means that you can afford $1,500 per month for your mortgage. This is at least a jump off point for a shopping trip for a new home.