Much Home Can You Afford?
That depends on a number of factors. Check
on them to see if you are ready to buy.
Provided by MidAmerica Financial Resources
a home make sense for you financially? It may or may not, depending on some financial,
career, and lifestyle factors. Your savings, your credit, your salary, your
level of disposable income, and your housing preferences all count.
If you are serious about becoming a
homeowner, you should have three priorities: keeping your credit score above
700, saving up the down payment, and getting pre-approved for a mortgage.
How can you
calculate how much home you can afford? The rules of thumb are fairly simple. If you
intend to assume a 30-year fixed rate mortgage, your monthly housing expenses
should amount to no more than 28% of your monthly gross income. For Federal
Housing Administration (FHA) loans, the general rule is that the mortgage
payment should be less than 31% of the buyer’s gross monthly income. For
Veterans Administration (VA) loans, the rule is that the debt-to-income ratio
should not exceed 41% of gross monthly income.1,2
How can you
accumulate enough for a down payment? If you are serious about home buying, you should
be saving money each month for that goal. Most people aim to put 20% down, so
they can avoid paying private mortgage insurance, but many buyers do purchase a
home with 10% or 5% down, while assuming the bill for PMI. With a standard FHA
loan, all you need to put down is 3.5% of the purchase price. VA loans require
no down payment whatsoever (and their interest rates compare to those of the
best conventional home loans).3,4
many real estate markets, VA and FHA financing limits on conventional home
loans make it easier for buyers to afford a nice house: they top out at
$417,000 in most metro areas, but rise to $625,500 in more expensive areas.4
about assuming a 30-year loan? Many homebuyers who think they will eventually
move up or move on choose a 15-year mortgage or an adjustable-rate mortgage.
The argument for 15-year mortgages and ARMs is simply stated: while you will
borrow the same amount either way, you will borrow it for twice as long at a
higher interest rate with a 30-year loan. So if you don’t see yourself living
in the home you buy when you are retired, the shorter-duration loan may be
How do you
know if you are NOT ready to buy? Look for some telltale signs. Do you suspect you
will live somewhere else in five years? Are you having a hard time deciding
whether you want to live in a single-family home, townhome, or condo? These are
signals to refrain from buying.
Typically, lenders want your total debt
load (mortgage consumer debts) to be less than 36% of your gross income. Is
yours higher than that? Then reconsider committing to a home loan. Your
household income might be too low to buy – while you may have enough money for
a down payment and closing costs, you may not earn enough to handle continuing
costs like mortgage payments, homeowner insurance, association fees, and
property taxes. Properly furnishing and maintaining a home may take more money
than you think. There is also the cost of a home inspection, a highly
recommended move before buying.3,5
If you have a credit score of 650 or less,
a mortgage lender may demand a larger down payment or larger fees than you
anticipate. If your score is underneath 600, you may be out of the running for
a loan. (FHA loans are an exception: buyers with FICO scores below 600 have
qualified for them.) If you have spent less than two years at your job, that
could also discourage a lender from issuing a mortgage to you.1,5
Is buying a
home the key to moving up economically? For some people, it is an important step. Some
real estate investors urge people to buy, if at all possible, rather than rent.
Your decision to buy should not be made lightly, or simply to keep up with your
peers. Do the math and think about how the commitment of home ownership aligns
with your life and financial goals.
MidAmerica Financial Resources may
be reached at 618.548.4777 or email@example.com.
This material was prepared by MarketingPro,
Inc., and does not necessarily represent the views of the presenting party, nor
their affiliates. This information has been derived from sources believed to be
accurate. Please note - investing involves risk, and past performance is no
guarantee of future results. The publisher is not engaged in rendering legal,
accounting or other professional services. If assistance is needed, the reader
is advised to engage the services of a competent professional. This information
should not be construed as investment, tax or legal advice and may not be relied
on for the purpose of avoiding any Federal tax penalty. This is neither a
solicitation nor recommendation to purchase or sell any investment or insurance
product or service, and should not be relied upon as such. All indices are
unmanaged and are not illustrative of any particular investment.
and advisory services offered through National Planning Corporation (NPC),
Member FINRA/SIPC, a Registered Investment Adviser.
MidAmerica Financial Resources and Malan Financial
Group are separate and unrelated companies to NPC.
1 - seattletimes.com/business/6-must-dos-before-buying-a-home/
2 - veteransunited.com/valoans/explaining-standard-for-debt-to-income-ratio/
3 - realtor.com/advice/buy/home-buying-myths/
4 - bankrate.com/finance/mortgages/home-loans-for-veterans-1.aspx
5 - forbes.com/sites/trulia/2016/08/31/7-warning-signs-youre-not-ready-to-buy-a-home/