Understanding What You Can Afford for a Home

Decide how much you can afford for a house before you shop for it, not later. Many prospective home buyers fail to do this and spend countless hours looking at homes that are way out of their price range.

There are a number of factors that influence how much you can spend on a home, including household income, the amount of the down payment, and the market rates and closing costs on mortgages in your area. Your total expenses will also be considerd, since they will affect how much income you have left to pay your home loan each month.

There are some rule of thumb ratios that most lenders use to take into account your income and expenses, debt ratios and closing costs, to decide what you can afford to pay for a house.

You can try to estimate these costs yourself, or you can make it easy on yourself by meeting with a mortgage consultant who will do this for you.

The first thing that most folks have a problem with is having enough of a deposit to begin with. People don?t routinely save as much as they used to, so frequently they will not have any decent balances in savings accounts. Lenders are no longer offering the dangerous no down payment mortgages now that credit is tight and they have to be more discriminating.

A minimum of a 10% deposit will normally be demanded. 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 amount you may need for closing costs. A lender can supply you with a good faith estimate of your closing expenses.

A very low assumption should be that you have to make $25,000 available. The next step is to find out what your monthly payments will be. You can calculate how much you can pay based on income and current expenses if you go to one of the many calculators available on the net, or you can take a simpler route and speak to a mortgage consultant.

Typically, the standard used is that your home costs should not exceed 25% of your income. But this does not take into account extraneous credit card debt. The remainder of your income above 25% should be devoted to food, 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 money to devote to the loan.

Without these complications, figure that a monthly income of $6,000 means that you can afford to pay $1,500 in mortgage, taxes and insurance. With this information at hand, you can now intelligently start to shop for a home.