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Can I Afford to Buy a Home? It's more affordable than you think. Before you begin your search for a home, you must answer one major question: How much can you afford? Determining a price range that you're comfortable with requires a lot of thought. To be accurate you must define your income, maximum down payment, monthly mortgage payment and the loan amount for which you qualify. If you want experienced, practical advice see A/Real Estate Connection. They can help! Only A/Real Estate Connection has the experience and skills necessary to help you answer these important questions. Visit A/Real Estate Connection and they will guide you through the following considerations: 1. Calculate the Monthly Mortgage Payment You Can Afford See Part 1 of the Buyers' Ratio Qualification Form Estimate Your Income Add your annual gross income (before taxes) with that of your spouse (if applicable) to get your Combined Annual Gross Income (refer to section 1a on form). Divide your total annual gross income by 12 to get your Combined Monthly Gross Income (refer to section 1b on form). Calculate Your Down Payment The amount of your down payment depends on how your transaction is structured and the desired type of financing. Typically, lenders require 10% - 20% of the total purchase price as a down payment or even as little as 5% for certain government loans. Generally, the more money invested in a down payment, the lower the interest costs will be over the life of the loan and the faster your equity will build. It's important to include additional expenses during your budget planning. Plan to have extra funds for:
Estimate A Monthly Payment You Can Afford As you review your financial picture and monthly budget, you will want to calculate how much you will be able to afford for your total housing payment (principal, interest, taxes and insurance). As you can see in Part 1 of the Buyers' Ratio Qualification Form, A/Real Estate Connection recommends two easy formulas to help you determine how much you can spend. Each depends on whether you have other long-term debts. 28% Rule: The total monthly payments for a home mortgage should not exceed 28% of your monthly gross income. (Refer to section 1c on form). Example: If your monthly gross income is $5,000, then your house payment should be no higher than $5,000 x 28% = $1,400. 36% Rule: Your total house payment and long-term debts (i.e. credit cards, car loans etc.) should not exceed 36% of your total gross monthly income. (Refer to section 1c - 1e on the form). Example: If your monthly gross income is $5,000 then the maximum you should spend on house payments and long-term debts is $5,000 x 36% = $1,800. If you spend $250 a month for a car loan, then your monthly payment should not exceed $1,800 - $250 = $1,550. NOTE: These figures are a rough rule of thumb. The ratios vary from 25% - 41% depending on your lender, type of loan you seek and the financial institution with which you are working. 2. Calculate the Mortgage Loan You Can Qualify For See Part 2 of the Buyers' Ratio Qualification Form Each lending institution has different procedures and many take a variety of factors into account before granting you a loan. You can get a general idea of the amount you will able to borrow by using the attached Mortgage Factor Chart. Simply locate the current interest rate and the term of the loan to find the mortgage factor. Then, multiply this number by the number of $1,000s you would like to borrow (i.e. the number would be 100 if you were planning to take out a $100,000 loan. Refer to section 2f). Multiply your loan amount by the mortgage factor to get the amount of your monthly payment. Compare this number to Part 1 to see if you will be able to afford this payment. Example: If your interest rate is 8% and the term of the loan is 30 years, your mortgage factor would be 7.34. As you can see in Part 2f of the Buyers' Qualification Form, if you take out a $100,000 loan, then your monthly payment would be: $100 x 7.34 = $734. Add this amount to the cost of taxes (e.g. $100) and insurance (e.g. $50) and you will have a total monthly payment of $884 (right in line with using the 28% rule in Part 1). 3. Calculate Your Price Range See Part 3 of the Buyers' Ratio Qualification Form Once you know the Total Mortgage Loan you qualify for (3j on form) and establish your Down Payment (3k on form), you will have the total price of the homes you may wish to consider. A/Real Estate Connection will help you determine how much you can afford, how you can arrange for a down payment and what financing options are the best for you. Money Saving Tip: Buy now! As you can see from the Mortgage Factor Chart, every time the interest rate changes, the loan amount for which you qualify will change. Buyers' Ratio Qualification Form Determine how large of a loan you will be able to receive from your lender. 1. Calculate the Monthly Mortgage Payment You Can Afford: a. Combined Annual Gross Income-> $__________ b. Combined Monthly Gross Income (a / 12 months)-> $__________ c. Total Monthly Debts (allowed by lender) No debts: Monthly gross income x .28-> $__________ With debts: Monthly gross income x .36-> $__________ d. Present Long-Term Monthly Payments (i.e. credit card)-> $__________ e. Total House Payments includes taxes and insurance (c - d)-> $__________ 2. Calculate the Mortgage Loan You Can Qualify For: f. Monthly Mortgage Amount (see Mortgage Factor Chart)-> $__________ g. Taxes-> $__________ h. Insurance-> $__________ i. Total Monthly Mortgage Loan Payment (f + g + h)-> $__________ 3. Calculate Your Price Range: j. Total Mortgage Loan-> $__________ k. Total Down Payment-> $__________ l. House Price Range (j + k)-> $__________
Mortgage Factor Chart Equal Monthly Payment to Amortize a Loan of $1,000 Term Rate 15 yrs
30 yrs
When you seek the guidance of A/Real Estate Connection you are working with knowledgeable real estate professionals. A/Real Estate Connection realtors have unparalleled experience, skills and up-to-the-minute knowledge of the real estate market in your area. East Texan homeowners and homebuyers each year trust A/Real Estate Connection. A/Real
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