Give her a hand: Sara was proud of herself because she had set a goal to save $25,000 to buy a home by the time she was 25, and she had finally managed to do it. She was ready to find her dream house; in her mind she was rich!
Sara had a steady job as a nurse and a comfortable salary of $38, 000. Her weakness was a brand new sports car of which a big chunk of her monthly income went into making a car payment. The next big bill was her credit card payment. However, she felt she was ready to become a homeowner.
After a few weeks, she spotted a home she wanted in a cute neighborhood with an asking price of $175,000. Could she afford it? Considering her car payment is about $550 a month and her credit card payment is $150 each month, she thought she could.
Like all homebuyers, she must understand the loan ratio scales used by mortgage lenders to determine whether a potential buyer qualifies for the amount of borrowed money — which translates into monthly payments — she will need to buy a home.
What’s it Take?
It’s actually the lender’s ratio — whatever formula he/she presently uses — that will determine if Sara will or won’t qualify for the $175,000 home.
Buyers have a certain amount of money – like Sara to spend on a housing purchase. Most have probably already determined an approximate amount they can afford for a down payment. But keep in mind, extra money will be needed for closing costs, and a “cushion” in your savings or checking account. In fact, your mortgage lender will probably require proof of one or two months’ mortgage payments in a bank account in order to approve your mortgage loan.
More on Lenders
As mentioned above, mortgage lenders use loan ratios to determine the amount of potential mortgage. Ratios are based on your gross annual income. Don’t simply assume that because a mortgage lender says you can afford a certain amount you really can. Your gut reaction to a monthly payment amount is probably a better gauge than any formula.
Assessing your current expenses and using them as your guide for how much you are prepared to spend is an even better method.
Prepare a list of your current expenses — how much you spend now, based on your current income, include all the basic and essential lists, but don’t forget the luxuries and non-essentials.
Make a close approximation to the amount you can spend in any given month. Then take this expense list and compare it to your monthly income. Add project raises, higher commissions, and bonuses only if you are sure you will get them. Err on the side of caution. Remember, if your home is foreclosed on, it will be at last three years before you can buy another
All things considered, it’s best to follow your own instincts when determining how much you can afford. If your mortgage lender insists you can afford say $1,000 a month, and you are uncomfortable going over $750, remember one thing: The mortgage lender is not the one writing the check to make the payment each month — you are!