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More Articles on Mortgages and Purchasing a Home
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10 Steps to Buying a Home
Deciding How much to put down
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Pre-Qualify
The best time of month to close
Escrows = Higher closing costs, plan accordingly
Home Buyer's Checklist - fill it out before you go looking
Things to remember After the Move
Things to remember Before the Move
How Much House Can you Afford
a chart of house prices based on what you have left over
Income and Debt
a chart of how high your payments can be
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How Much House Can You Afford?
How much house you can afford versus how much the bank can qualify you for is a decision you need to make on your own, but this article will help you arrive at a reasonable number and the price of houses that are within your range depending on how much you make each month.
Let's be honest, it all comes down to the payment and what you have left over for other things.
When a bank tells you how much you qualify for they can only see the bills on the credit report. What doesn't show up on that credit report can make a huge difference in whether you can really afford the house that they say you qualify for.
Just look at all the things that don't show up in these decisions that the bank makes. Groceries, Gas and Insurance for your car each month, the cost of child care (or how many kids you have!), the cost of going to the movies or going bowling or taking a vacation. If you want to make sure that you can afford this house you need to take the time with your mortgage person to figure out ALL these things.
Here at Daily Interest we will help you understand the payments and make sure you are not afraid to ask for help to decide if you can really afford the house or the house payment.
Calculators are great, but if you don't know all the different variables to put in, the answer may not be accurate. I have put this chart together to give borrowers an idea of how much house you can afford based on the income you have after your bills and different interest rates.
What you can Qualify for is not necessarily what you Afford
For the record, the bank will tell you that you can "Qualify" for a mortgage that is 28% of your gross income and that your total monthly bills (including the mortgage) can be up to 36% of your gross income in order to qualify for a conforming mortgage with the best mortgage rates.
This means that the bank says that if your gross income is $7,500 a month or $90,000 a year that your mortgage payment can be $2,100 a month and your total bills can be $2,700 a month. OK, great, but is that really what you can afford?
Let's compare this to an average couple, Joe and Sue, with 3 kids, 2 cars and a vacation every year to Florida. Here are some expenses they likely have.
| If they pay about 25% of that $7,500 in taxes | $1875 a month |
| their groceries are about $200 a week | $800 a month |
| the car insurance is $200 a month | $200 |
| gas for the cars is $250 per month | $250 |
| Utilities...phone,
electricity, gas, cable, internet |
$350 |
| That vacation for the 5 of them costs about $5,000 | $417 a month |
Just these things cost about $3,900 a month.
Now let's add in the 2 car payments of about $300 each, and $200 a month in credit card bills for another $500 a month. Note that this $500 is the only thing that shows up on the credit report and fits within the banks rules!
Now we are at $4,400 a month and we haven't even talked about the house.
This leaves $3,100. After the $2,100 for the house payment, there is $1,000 left every month. If this couple saves 10% of their take home pay or $750 per month, there is only $250 per month leeway to pay for doctor visits, pizza, sports for the kids..........well, you get the idea.
They bought the house the "qualified" for, not a house they could afford.
The bank told them that they could afford to have less than 20% of the gross income left over. It sounds like they needed more. If only Joe and Sue had sat down and figured out ALL the bills, they probably would have bought a cheaper home with a cheaper payment.
Summary
If they only had a mortgage banker who actually cared that they could afford the home and had taken a little time to go through ALL the bills with them, they might have made some different choices.
Unfortunately, there are some mortgage people that are only there to answer the phone and "sell" you a mortgage. These are the same people that are afraid to lose a deal and a paycheck, so they never warn folks about what they are getting themselves into.
A mortgage is something you have to live with for many years to come, be sure to work with someone who will show you the whole picture.
Of course, I hope that will be me since you are reading this article! Give me a call, email or use the online chat if I can answer any questions for you.
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Harry
Smith
email Harry@dailyinterest.com or reach me by phone Office 1-248-548-7655 Cell 1-248-514-9000 |
Drew
Smith
email drew@dailyinterest.com or reach me by phone Office 1-248-548-7655 Cell 1-248-703-7770 |
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