Today's new homes offer a wealth of options and features for which your parents and grandparents could only dream. But before your home wish list gets too long, it helps to have a rough idea of how big a mortgage loan you can handle.
The best way to figure out the amount of the loan you can afford is to prequalify. By pre qualifying, you ar not guaranteed to get a loan, but you will at least have a ballpark figure to work from. Prequalifying can be done either on your own or with the help of a builder, lender or real estate professional. Many real estate or housing finance professionals have computer programs that can quickly calculate the size of the mortgage you can handle.
Prequalifying involves looking at your household's income and assets, calculating your regular monthly expenses, and then determining how much might be left over each month for a home loan. If you are unsure how to begin, you should tell all the people in your household to save and identify all purchase receipts for a month or two. From the receipts, your checkbooks and credit card statements, you should be able to make a reasonable estimate.
If you have a computer with spreadsheet software, you may want to set up a simple spreadsheet to record you income and expenses on a regular basis. The computer can also keep running totals to help you better visualize your household budget.
On the income side, you obviously need to calculate your household's take-home pay, which is your gross pay minus taxes. You can also include any interest, dividends, rents or other income that you regularly receive. do not include income from assets that you plan to use for a down payment.
For non-housing expenses, there is a long list of items. You need to determine how much you normally spend on food and household supplies. other expenditures might include: car payments and expenses; installment payments such as credit cards; clothing; medical costs and insurance; life and automobile insurance; commuting costs; recreation/hobbies; telephone; contributions/dues/fees; personal expenses (dry cleaning, hair styling, etc.); student loan or child support payments (if applicable); entertainment and any miscellaneous expenses. You should also calculate a portion of your income to be set aside for savings, which is an important part of any household budget.
After you have figured your income and non-housing expenses, you are ready to calculate your monthly housing expenses. You can think of this component as being composed of four pairs of items. The first is the principal and interest on your mortgage, which is the amount of the monthly payment you make to your lender. The second is taxes and insurance, which includes your property taxes and homeowners insurance. The third is heat and utilities, which includes charges for your heat, water, electric and gas. And the fourth is for maintenance and repair, because you need to have money set aside to keep up you new home (e.g., changing filters, periodic painting and landscaping) and to repair items that may need to be fixed in the future.
You will be in pretty good shape if the principal and interest on your loan's monthly payment is no more than 28 percent of your monthly income. If you have a lot of other financial obligations, a lender will look at your total debt load, which would include your mortgage, all other outstanding loans, credit card debt, child support and others. This should be no more than 36 percent of your monthly income.
Of course, one of the most important factors affecting the amount of loan you can afford is the mortgage interest rate. When rates drop, as they have recently, you can afford more home with the same amount of income. Likewise, should rates begin to rise again, you will be able to afford less. So if you want to buy a new home, figure out what you can afford then find a home that fits your needs and budget.
May not be used without written permission from The Home Builders Association of Northwest Florida.