Buying a house is a BIG deal! When purchased at the right time and within your financial ability, a house can be great for your family. In this episode we help you understand how much house you can afford. We break down all the housing related numbers to help buy the right priced house.
How much house can you afford?
“Mort” “Gage” =Death Pledge
Mortgage lenders use something called qualification ratios to determine how much they will lend to a borrower. Although each lender uses slightly different ratios, most are within the same range. Some lenders will lend a bit more, some a bit less. The ratios below are an average of what the industry uses as standard.
Rules to affordability (Bank's Method)
Max Principal + Interest + Taxes + Insurance (PITI) payment 28% of gross monthly income.
For an $80K combined gross annual income, mortgage should not exceed $1866.
Max housing cost 32% of gross monthly income, or $2133.
One of the best way to keep your finances healthy is to keep your housing cost as low as possible. Having a lower cost mortgage payment and for a shorter period of time will free up money you can save to ensure your financial future.
Max total debt payments including your mortgage not to exceed 40% of gross income, or $2667.
Calculating how much house you can buy
Assuming a 30- year mortgage with a fixed 4.5% interest rate, every $100,000 borrowed costs $507 per month.
($1244 / $507) x $100,000 = $245,000 + down payment
Total Housing Cost = $2133 (32 % of gross income).
Mortgage (P & I) = $1,244
Insurance = $125
Property Taxes = $497
Other housing exp. = $267 (electric, water, gas, internet, cable).
$80,000 Gross - 18% (Federal and FICA) = $65,600 or $5467/mo.
Total Housing Cost $2133 = 39% of Net Income ($2133 / $5467)
Our Recommendations (30% of Net vs 32% of Gross)
Use 30% of Net Income to calculate your mortgage and housing cost (Spending Guidelines)
$80,000 Gross = $65,600 Net
Total for Housing Cost - 30% of $65,600 = $19,680/yr. or $1640/mo.
$170,000 Loan ($200,000 House with $30,000 down payment)
Total Housing Cost = $1640/mo.
Mortgage = $861
Property Tax = $340
Insurance = $110
Other Housing Expenses = $329
Shopping for your house
Determine what you need and what you want in a house. Understanding the difference between what’s a need and what’s a want is important because once you start looking you’ll need to prioritize needs over wants. You have to get all your needs but can skip out on some wants if the budget doesn’t allow it.
Start with your dream home.
Where would it be located?
What size would it be?
How many bedrooms? Bathrooms?
2 or 3 car garage?
Size of lot / backyard space?
Now, based on the price you know you can afford you can begin searching for a suitable house. This is where a real estate agent can help.
You may need to compromise by doing the following:
Increase commute to get a bigger and better home that meets more of your wants or cross off some of the wants to have a shorter commute or be closer to the city.
Get a slightly smaller house (3 instead of 4 bedrooms) in the location or neighborhood you want.
Add the swimming pool later.
Get an older home in the area you want, which you can update later.
Focus on “value items”
Items that add value include:
A beautiful view
Top-rated school district.
How to find a realtor
A licensed real estate agent must also be a member of the National Association of Realtors. This requires additional training above the licensing requirements that all agencies must meet. Realtors:
Complete ethics courses and exams, and
Make a commitment to uphold the association’s ethics standards, which are more stringent than both federal and state laws.
Word of mouth referrals are generally how people find realtors but, be careful. Make sure to interview the person to make sure they will do a great job for you.
Interview 2 to 3 realtors to make sure you can find one that will serve you best.
The realtor should take the time to educate you in the process so you understand every step of the transaction.
He/she should offer insight and knowledge but not push you or try to sell you something you don’t want