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How much home can you afford?

Calculating How Much Home You Can Afford:

When figuring out how much home you can afford, most people typically spend about a third of their income on financing a home. The first step in finding the home that is right for you is to calculate how much home you an afford.
Mortgage lenders look at your ability to repay the mortgage loan by reviewing the following factors for how much home you an afford:

• Your past credit history and FICO score.
• Your total monthly gross income
• How much cash you have for a down payment, which is usually 10 percent to 20 percent of the sale price but in some cases can as low as 0 percent.

Planning is the key to a successful home purchase, said Doug Anderson, a member of the National Association of Mortgage Brokers. The Denver, Colo., broker says in today’s market interest rates are low, but real estate prices are high.
"You should pay off as much debt as you can before shopping for a house," said Anderson, such as car loans and credit card bills. "And try to save a couple of hundred dollars a month for the down payment to bring down the loan amount."

General guidelines
It is easy to determine how much house you can afford by following a few general guidelines:
• Your monthly mortgage payment -- including principal, interest, real estate taxes and homeowners’ insurance -- should not be more than 28 percent of your gross monthly income (before taxes). This is your housing expense ratio.
• Your total monthly debt obligation should not be more than 36 percent of your gross income. Total debt includes the mortgage payment plus other obligations such as car loans, child support and alimony, credit card bills, student loans, condominium association fees. (Note: Government and certain other lenders may be more lenient.) This is your debt-to-income ratio.

Example
Using an example of a homebuyer who makes $40,000 a year. The maximum amount of money available for a monthly mortgage payment at 28 percent of gross income would be $933. However, the lender says the total debt payments each month should not exceed 36 percent, which comes to $1,200.

The following chart may help you see what your maximum monthly debt loan is based on your annual gross salary. You can figure out how much home you an afford by subtracting your debt from the figures that match your annual income:

Gross income 28% of monthly 36% of monthly
$20,000 $467 $600
$30,000 $700 $900
$40,000 $933 $1,200
$50,000 $1,167 $1,500
$60,000 $1,400 $1,800
$80,000 $1,867 $2,400
$100,000 $2,333 $3,000
$150,000 $3,500 $4,500


Taxes and Insurance

There are a few other considerations to compute when deciding how much home you can afford. Be sure that you have taken into account the other expenses that come with buying a home.

• Real estate taxes -- Since taxes are part of your monthly mortgage payment, it is important to get an estimate of the property taxes in the area where you want to look for a home. You can ask your real estate agent, or call the tax office in the town where you are house hunting and ask what is the local tax rate.
• Homeowner’s insurance -- You must insure your property in order to obtain a mortgage. You can get an estimate of insurance costs from your insurance agent or a major insurance company in the area where you are house hunting. Be sure to inquire about special requirements for hazard insurance, such as mandatory coverage for floods, earthquakes, or windstorms in coastal areas. If you put down less than 20 percent of your home's value, you also will have to pay private mortgage insurance (PMI).

 
     
 
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