Are You Thinking To Buy a New Home?

It takes time to find a home you love, and once you do, the first question that comes to your mind should always be: “How much can I afford?” You might want a beautiful house considering the age, number of rooms, size, lawn, location or a swimming pool. One thing is certain, if your payment for mortgage amounts to more than half of your monthly income you will end up with an attractive, unfurnished house.

Affordable Payment:

Are You Thinking To Buy a New Home

Federal Housing Administration (FHA) uses a guideline to approve mortgages known as debt-to-income, which amounts to 43%. This particular ratio is used to determine whether the mortgagor can repay the debt. This ratio changes with market conditions.

The housing debts might not be the only debts you have to pay. There are always other expenses one needs to consider, for instance, insurance, property tax, income tax, etc. All of these expenses, including the house mortgage needs to be less than or equal to 43% of your gross income.

For example, your gross income for the month is $2,000. Multiply this number by 43% (0.43) and it amounts to $860. Your monthly debts, including the housing mortgage should not be more than $860. Consider that you have another $200 to pay in terms of student financing, car loan and utility bills. In this case, you can spend an amount of $660 per month on the purchase of a house.

You should also account for the front-end debt-to-income (DTI) ratio. This is the monthly accrued debt of the house only. This ratio is also changing depending on the economy. If the economy is undergoing recession DTI is usually above 30%. For instance, if your monthly gross income is $2,000 and the DTI is 31%, you will have trouble getting an amount of $860 to be approved for housing expenses, even if you do not have any other Deb to pay. Your housing expenses should be under $620 (2000 x 0.31).

Why can you not use the full debt-to-income ratio if you are debt free? You might be debt-free, for the time being, but somewhere down the line you might consider loaning a car. If you’re already using the full DTI ratio, you will have no space to cater for the added expenses.

Factor Budget Items:

Your love to eat expensive food, go on a vacation every month, throw parties or drink expensive, are hobbies that are not draining up your income. However, if you buy a home consuming full DTI, 43%, then these hobbies will become a reason to skip or postpone the payment of your utility bills. Pick your most expensive hobby and subtract that amount from the aggregate payment you calculated. If the resulting amount is not enough for you to purchase the house you love, then you might have to cut back on the expensive hobbies or otherwise turn to inexpensive hobbies.

Financial Factors:

Financial Factors

When you sell your current house, save the money in a savings account, factor in expenses such as student loans, etc. and determine if you can still afford the mortgage.  Remember to account for the surplus funds required for utilities and possible maintenance. If, without incurring additional credit card debt, you can manage the surplus expenses then you can afford to buy a house.

Don’t buy a home based on future income:

A promotion or a career jump is not always possible. If you consider buying a house based on these possibilities then make sure you have a lot of credit cards because you will have to live off them for a long time to come.

Down Payments:

In order to elude the payment of private mortgage insurance (PMI), it is advisable to pay 20% of the house price up-front. PMI can amount to an added $50 to $100 per month. It could even be more or maybe even less. At any rate, a small down payment doesn’t mean you can’t buy a house. If you have an FHA loan, your down payment can be as less as 3.5%.

Benefits Of Making A Large Down Payment:

  • The monthly mortgage payment decreases. If your mortgage is $100,000 for a period of 20 years with an interest of 5%, you will have to pay $660. If your mortgage is $70,000 for a period of 20 years with an interest of 5%, you will have to pay $462.
  • You will have more choice for lenders. In the market, some lenders do not finance, unless the down payment is at least 5-10%.

Even though there are a lot of benefits if you make a large down payment, it does not mean for you to deplete your entire savings account for the sake of your home. It might be troublesome if some unexpected expense needs to be incurred.

Market Condition For Buying A Home:

Market Condition For Buying A Home

You should not buy a house when the demand is on the rise. Contact a local hotel and ask when the demand in the particular area decreases. A nice time to buy a house is when that happens. Another tactic is to wait until October if you choose an area with a lot of families. That’s when the kids are already in school.

It is hard and equally risky to find the perfect market conditions for buying a home. In a particular area, if the prices go up you can decide to wait. In that situation, maybe the prices go even higher making the house in that particular area out of your grasp. Sticking to a payment range you can afford, if you plan on living in the new house for a period of 10 years or higher, buy a house wherever you want and whenever you want.

Right Time To Buy A Home:

If you cannot decide on the city you want to live in and what you will do in a period of ten years, do not buy a home, it is not the right time. If you do not have a plan for the next ten years, buy a home that is cheaper than the maximum amount you can afford.

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