Before you even think about shopping for a home, you should decide how much you are able to afford to pay for it. This will save you untold hours looking at homes that you should not really be in the market for to begin with.
There are a number of factors that determine how much you can spend on a home, including household income, the amount of the down payment, and the market rates and closing costs on mortgages in your area. Lenders will also look at your current debt and fixed expenses, since you will have to go on paying such bills and they want to make sure you have enough income left to pay the home loan.
To do this, lenders use certain ratios that tell them what you will be able to afford, ratios based on income, expenses, debt, down payment and closing costs.
It is possible to calculate these costs on a worksheet, or you can get in touch with a mortgage broker who will be happy to make the calculations for you.
One of the largest stumbling blocks to owning a home is the deposit. Today, people don?t put aside a fixed amount of money into a savings account to save up for something. No down payment loans are rarely granted today days, since they were such a big part of the mortgage problems over the last few years.
Usually, you won?t be able to close on a home loan without at least a 10% deposit. If the home you are looking for is in the range of $200,000, you will need $20,000 for a down payment and additional funds for closing costs. Lenders will be happy to give you an estimate of the closing costs.
A very low assumption would be that you have to have $25,000 available. Can you also afford the monthly payments? You can calculate how much you can pay based on income and current expenses if you go to one of the many calculators available on the net, or you can take a simpler route and speak to a mortgage consultant.
Typically, the standard used is that your housing costs should not be more than 25% of your income. But this does not reflect extraneous credit card debt. The balance of your income above 25% should be devoted to clothing, utilities, savings, education and entertainment. A high credit card debt will mean that you will have that much less available for your basic needs.
Barring high credit card debt, you can figure that if you earn $6,000 a month, you can afford a payment of $1,500 for the home loan, taxes and insurance. This is the smartest way to shop for a house, once you really know how much you can afford.