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In just 4 Steps Analyze How much House you can Afford

There are many people who want to apply for home loans but they don’t know that how much house they can afford. So in order to help those people in this article I have explained that how in just 4 steps you can calculate that how much house you can afford.

house cost

Step One – Calculating Your Monthly Income

When a loan officer prequalifies you, in order to figure your maximum mortgage amount he works backwards. You can do the same thing. The first step in this regard is that you have to determine your monthly income. It isn’t very easy. Only that income is counted by the Lenders which they can document through paperwork.

Calculation for Salaried Employees

It’s easy if you are a salaried employee, and you don’t earn any bonuses. Take out your paycheck. If you are paid twice a month, then you have to multiply by two.

If you are paid every two weeks, then you have to multiply by 26 (the number of pay periods in a year) and then you have to divide it by twelve. Unless you’re a teacher. Teachers don’t always work year round and they have special rules.

Calculation for Hourly Employees

It is also easy to calculate if you are working as an hourly employee who works a straight forty hours a week and also don’t earn any overtime income. Look at your paycheck, and then multiply your hourly rate by 40, multiply the total by 52, and then divide it by twelve.

Calculation of income for those who earn overtime, bonuses, or commissions

If you earn overtime, bonuses, or commissions then it isn’t as easy to calculate your income. For a close estimate you may take out your W2 forms for the last two years. Then you have to add them together and then divide the total by twenty-four. That is your monthly income.

This method can be used by a teacher, a nurse, a seasonal employee, those in construction, or by those who earn only part-time income.

income

Calculation for Self-employed

If in case you are self-employed or receive 1099 income, then a two-year track record is required for you. Lenders considers that income that you have declare to the IRS, since that is documentable.

Take a look at the Schedule C of your tax returns for the last two years and your annual income is the number at the bottom that says “profit”. You may add any depreciation to that figure. Then you have to add them together and divide them by twenty-four.

These calculations do have variations and exceptions (like those who own their own corporations) but most people are covered by the above mentioned calculations method.

Step Two – Working Backward

Once that you have calculated your monthly income, you them have to multiply it by the back ratio for your particular loan. For generic purposes, to work with thirty-eight is fairly easy. You have to take 38% of your monthly income or multiply it by .38. Doing this you will get the maximum amount the lender wants you to spend on your housing costs and monthly consumer debt combined.

Now in order to determine what you spend monthly on debt take out your bills and total them up. Your auto insurance or your utilities should not be included in it. Just creditors. Use the minimum required monthly payment for credit cards, unless it is less than ten dollars.

Then you have to deduct that amount from the total that the lender wants you to spend on housing costs and consumer debt combined. Now you get the maximum the lender wants you to spend for housing costs, unless the figure is greater than 33% of your monthly income. Of course there are exceptions to it.

housing cost

Step Three – You just have to do a Little Guesswork

The next thing that you have to do is to guess a little. If you have a vague idea that for what price you might qualify, then you can estimate that what would be your annual property taxes and homeowners insurance cost. From there, it will be easy for you to calculate the monthly equivalent. Then you have to subtract those figures from your maximum monthly housing costs total.

If you are choosing to buy a condominium (or an area with HOA fees), then you have to subtract out an approximate figure . What is left behind is your maximum principal and interest payment.

The Final Step – Calculate using Mortgage Calculator

Now you are required  to go to a mortgage calculator (click here) and there you have to plug in some numbers. In the “payment” area you have to insert the figure you just calculated. Then you have to plug in the current fixed interest rate. If in case you are putting less than 20% down, then you should add a half percent to the rate in order to allow for charges you will have to pay for mortgage insurance.

As soon as you hit the calculate button you should have your maximum mortgage amount. You have to add your down payment and then your maximum purchase price is in front of you.

It might be possible that you may have to do some fine-tuning to zero in on the exact figure. In addition to this, lenders know that how they can “stretch” a client a bit higher if they need it.

Advice

If the figure is less than what you have expected (or need), then lenders are aware of programs by which they can help “boost” you higher in qualifying. In addition to this, they will do what you just did for free, they are much more experienced at the various nuances that are involved in the process, and you will have no obligation to use them as your lender.

You just need to pick up the yellow pages and a phone.

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