The rising of home prices is a put down to many prospective home owners. The rule of thumb is that prospective home owners can manage to pay for a mortgage that is priced 2 to 2.5 of their gross income. This means that a person with an annual income of $100,000 can manage a mortgage of between $200,000 and $250,000. Prospective home owners should consider the lender’s view, their finances and preferences.
The lender’s view
Lenders judge the ability of borrowers to buy a home basing on: front-End Ratio, the Back-End ratio and down payment.
The percentage of borrower’s annual income committed to paying the mortgage per month is called the Front-End ratio. Mortgage payment comprises: principal, interest, taxes and insurance, collectively referred to as PITI. As a rule PITI should not exceed 28% of the gross income. Many lenders though allow borrowers to exceed 30% or even 40%.
The percentage of a borrower’s gross income needed to cover the debts is referred to as the back-end-ratio or the debt-to-income ratio. Debts are the mortgage, credit card payments, child support and other loan payments. The recommend debt-to-income ratio should not exceed 36% of the gross income. Maximum monthly debt ratio can be calculated by multiplying annual gross income by 0.36 and dividing the results by 12.
To be considered for mortgage loan the borrower should afford at least a down payment of 20% of the purchase price. However, some lenders accept a lower down payment.
The house poor option
It is sad that some prospective home owners choose to become “house poor”. They go for high mortgage to buy expensive homes at the expense of other competing everyday expenditures. Most of their income goes to service the mortgage. This road is selected basing on assumption that raises and promotions will increase the income, consequently diminishing the monthly mortgage expenses.
Getting personal
Getting approved for a mortgage doesn’t mean that the borrowers can meet the expenses of the mortgage. Borrowers should take in consideration their income, expenses, lifestyles and personality before going for the mortgage.
The prospective homeowners eying a mortgage should weigh their incomes by considering its ability to meet the mortgage payments, the stability of their jobs, and chances of getting same or better job in case of job loss.
They should also consider future expenses like college fee for children, buying a new car, and such like items, and vacations. Besides, the borrowers must consider changing their lifestyle in order to be able to comfortably afford a mortgage. In addition, they ought to consider their personality. Does a little debt drive you crazy or you live easily with debts, are some of things to put into perspective.
Some houses may need major repairs, or expensive appliances like stoves, dishwashers and refrigerators. Besides, utilities like heat, light, water sewage, trash removal, among others.
Other expenses worthy bearing in mind include association fees, if the home is in a planned community, furniture and décor for the house
