Before you even consider about shopping for a home, you should decide how much you are able to afford to pay for it. Sadly, most borrowers have no clue how much they can afford to pay for a house and end up wasting their time looking at houses that they find, once they apply for a mortgage, are way out of their price range.
It is important to understand what lenders will use to decide what you can afford, such as your total income, how much you are depositing, what the closing costs will be, etc. What your expenses are and will be is another important component in this determination since the lender will want to make sure you can cover the monthly payment after these important expenses.
There are some rule of thumb ratios that many lenders use that take into account your income and expenses, debt ratios and closing costs, to decide what you can afford to pay for a home.
It is possible to calculate these costs on a worksheet, or you can contact a mortgage broker who will be happy to make the calculations for you.
The first thing that most people have a problem with is having enough of a deposit to begin with. People don?t routinely save as much as they did in the past, so frequently they will not have any decent balances in savings accounts. No down payment loans are rarely granted today days, since they were such a big part of the mortgage problems over the last few years.
Figure at least a 10% down payment as a requirement for most banks. If the house 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. Lenders will be pleased to give you an estimate of your closing costs.
So let us suppose that you need $25,000 to start looking for a house. Can you also afford the mortgage payments? There are mortgage affordability calculators on the internet, or you can ask a mortgage consultant to do these calculations for you.
The traditional rule is that your housing costs should not exceed 25% of your income. However, if you have high credit card debt, it will affect this rate. The remainder of your income above 25% should be used for clothing, utilities, savings, education and entertainment. If you have high credit card debt that has to be paid, that will be subtracted from your income when the bank is calculating what you can afford.
If you net $6,000 a month, you can afford a mortgage payment of about $1,500 (25%), barring any other large, fixed expenses. With this information in hand, you can now really start to shop for a home.