How Much Can you Afford when buying a home?
When applying for a home loan, you need to consider your personal finances. How much you make against how much you are in debt will probable establish how much a lender will let you to borrow.
First, establish your gross monthly income. This will contain any regular and recurring income that you can document. Unfortunately, if you can’t document the income or it doesn’t show up on your tax return, then you can’t use it to qualify for a loan. However, you can use unearned sources of income such as alimony or lottery payoffs. And if you own income-producing assets such as real estate or stocks, the income from those can be estimated and used in this calculation. If you have questions about your specific condition, any good loan officer can review the rules.
Next, calculate your monthly debt load. This includes all monthly debt obligations like credit cards, installment loans, car loans, personal debts or any other ongoing monthly obligation like alimony or child support. If it is revolving debt like a credit card, use the minimum monthly payment for this calculation. If it is installment debt, use the current monthly payment to calculate your debt load. And you don’t have to consider a debt at all if it is scheduled to be paid off in less than six months. Add all this up and it is a figure we’ll call your monthly debt service.
Most lenders don’t want you to take out loans that will surplus your ability to reimburse everybody you owe. Although every lender has different procedures, here is a rough idea of how they look at the numbers.
Your monthly housing expenditure, including monthly payments for taxes and insurance, should not exceed about 30 percent of your gross monthly income. If you don’t know what your tax and insurance expense will be, you can estimate that about 15 percent of your payment will go to this expense. The remainder can be used for principal and interest repayment.
In addition, your proposed monthly housing expense and your total monthly debt service combined cannot exceed about 36 percent of your gross monthly income. If it does, your application may exceed the lender’s underwriting guidelines and your loan may not be approved.
Keep in mind that there are hundreds of loan programs offered in today’s lending market and every one of them has different guidelines. So don’t be discouraged if your dream home seems out of reach.
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