How Much Home Can You Afford?

The single most important part of buying a house is figuring out how much you can realistically afford to pay.You'll have to take a good look at your budget, debts, credit reports, and credit score. Once you have a good picture of your financial status, start saving as much money as you can for a down payment, closing costs and other extra expenses that come along with buying a house. Extra expenses could include paying for a home inspection (around $300 - $500 depending on where you live) or hiring a moving company after the sale is final.  Other things that you will want to consider are the appraisal which could range from ($300 - $450) depending on your market; Earnest money generally $1,000 in the Chicago Metropolitan Real Estate market depending on the price of the home. 

Depending on the condition of your finances -- if you have a lot of debt, errors on your credit report, or a low credit score -- getting ready financially could take six to 12 months or more! If your credit score falls below 620, lenders may see you as a risky borrower. This might mean you will need to work on your credit and possibly consider other options, such as Renting with an option to buy.  It might be worth your time to take a year and work on building a better credit report before taking on the responsibility of a mortgage. Also, if you qualify for a lower interest rate you could save thousands of dollars over the life of the loan.

Determining a Mortgage You Can Live With
There are a few basic formulas commonly used by lenders to determine how much of a mortgage you can reasonably afford. These formulas are called qualifying ratios because they estimate the amount of money you should spend on mortgage payments in relation to your income and other expenses. It is important to remember that these ratios may vary from lender to lender and each application is handled on an individual basis, so the guidelines are just that - guidelines.

Generally speaking, to qualify for conventional loans, housing expenses should not exceed 26 to 28 percent of your gross monthly income. Monthly housing costs include the mortgage principal, interest, taxes and insurance. For example, if your annual income is $30,000, your gross monthly income is $2,500, and $2,500 x 28 percent = $700. So you would probably qualify for a conventional home loan that requires monthly payments of $700.

For more information on pre-qualification and owning a home of your own, please visit my website!

Cecelia Marlow - PanAmerican Mortgage, LLC

www.ceceliaknowsmortgages.com