Is It The Right Time To Buy A House? If So, How Much House Can You provide?
These days we are seeing sales of existing homes falling as much as 1 percent in a month. Some major cities, like Philadelphia, have seen home sales drop by more than 20%. In such before hot markets like South Florida, California and Nevada, home prices continue to slide. Recently a Federal home-price index recorded its biggest decline as it was reported that National home prices are essentially stuck in quicksand.
Financial markets are growing more convinced that the Fed has now moved to the sidelines and will not cut rates further out of concern about inflation pressures. The Fed aggressively cut rates seven straight times starting in September of 2007, with the last reduction occurring in April of 2008.
Considering current economic conditions, is this a good time to buy a home? If so, how much should you use on a home? Once you’ve decided to forego your renting ways and start paying off own mortgage instead of someone else’s, the question you must ask yourself is how much house or truly, home much mortgage can you provide? This question has two answers: 1) how much do you feel comfortable borrowing? And 2) how much will a lender give you?
You can use mortgage calculators to help you determine the answers to the above questions. This article will help you understand the inputs to these calculators, so you can be sure that you precisely determine how much home you can provide.
When it comes to how much house you can provide, you are the best expert. Before you sign up for the maximum mortgage for which you qualify, consider that how much may truly get you outside your comfort level. Home buyers need to consider their future carefully before choosing a mortgage. Big life changes can average trouble when it comes to making your payments. If you’ve never made a budget, before you buy a home would be a great time to start. Think about how much cash you think you can comfortably provide to devote each month to housing (mortgage) payments? Are you willing to forego movies and dinner out or bring lunch to work every day? What about giving up a second car? Some people will do anything to own a home. The problem is some stretch themselves too far and find themselves pouring all of their income into the house. The consequence is long-lasting financial stress.
The problem for many first-time home buyers is they make the mistake of assuming they can provide monthly mortgage payments as big as their current rent payments. While it makes a certain amount of sense, that calculation overlooks some major factors. character taxes and all those other ownership-related costs can add up to about the equivalent of three or more months of rent a year. Other monthly expenses to consider include mortgage loan and home owners insurance, the mortgage insurance is required by lenders if you have a high-ratio mortgage (usually when the loan to value of the home is greater than 80%).
There is a more precise rule of thumb for calculating how big a mortgage you can provide. First, you need to know your total monthly debt load and your total monthly housing costs to figure out an affordable maximum mortgage payment.
Keep your debts around 40 percent. In other words, the combined amount you pay in housing costs, car loans, personal loans and credit card debt shouldn’t be more than 40 percent of your pretax income. To calculate your current TDS, divide your monthly debts by your monthly pretax income and multiply by 100. To determine what lenders will consider your maximum allowable debt, multiply your gross annual salary by 0.40 and then divide by 12.
Cap your housing expenses at 32 percent. That method your monthly mortgage payment, character taxes, insurance payments and heating & utility costs shouldn’t be more than 32 percent of your monthly pretax income. To calculate your current GDS, divide your total monthly housing expenses by your gross monthly income and multiply by 100. To determine what lenders will consider your maximum allowable housing expenses, multiply your gross annual income by 0.32 and then divide by 12.
To determine your maximum mortgage amount, lenders use the above guidelines, called debt-to-income ratios. This is simply the percentage of your monthly gross income (before taxes) that is used to pay your monthly debts. Because there are two calculations, there is a “front” ratio and a “back” ratio and they are generally written in the following format: 33/38.
The front ratio is the percentage of your monthly gross income (before taxes) that is used to pay your housing costs, including principal, interest, taxes, insurance, mortgage insurance (when applicable) and homeowners association fees (when applicable). The back ratio is the same thing, only it also includes your monthly consumer debt. Consumer debt can be car payments, credit card debt, installment loans, and similar related expenses. Auto or life insurance is not considered a debt.
A shared guideline for debt-to-income ratios is 33/38. A borrower’s housing costs consume thirty-three percent of their monthly income. Add their monthly consumer debt to the housing costs, and it should take no more than thirty-eight percent of their monthly income to meet those obligations.
The guidelines are just that and they can be flexible. If you make a small down payment, the guidelines will be more stiff. If you have marginal credit, the guidelines are the most stiff. Conversely, if you make a larger down payment or have sterling credit, the guidelines are less stiff. These guidelines can also vary according to loan program. FHA guidelines state that a 29/41 qualifying ratio is permissible. VA guidelines do not have a front ratio at all, but the guideline for the back ratio is 41.
For example, if you make $5000 a month, with 33/38 qualifying ratio guidelines, your maximum monthly housing cost should be around $1650. Including your consumer debt, your monthly housing and credit expenditures should be around $1900 as a maximum.
To arrive at an “affordable” home price, follow the guidelines of most lenders. I recommend allowing a total debt-to-income ratio of no more than 36 percent. Assume a housing payment-to-income ratio of 28% for a conservative calculate and 33% for an aggressive one. Before buying, however, you should also factor in other savings needs, including retirement (401k) and college.
Following is a list of typical income and debt obligations you may need to know to precisely complete mortgage calculator calculations.
1) Current combined annual gross income
2) Monthly child sustain payments
3) Monthly auto payments
4) Monthly credit card payments
5) Monthly association fees
6) Other monthly obligations
The housing market is currently facing numerous troubles as buyers stay on the fence and rising mortgage defaults dump more homes on a glutted market. This can be a great time to buy a house, if you can provide one. Once you’ve had a chance to pull together your financial information and think about how much house you want, find out how much house you can provide with our mortgage affordability calculator. Then, check out the going mortgage rates for your area.