Figure Out ACTUAL Home Price You Can REALLY AFFORD?
Your Lender gives you a prequalification letter with an amount to tell your REALTOR® the home price to start looking for. However, life has changes (a future job change, baby, taking care of parents or family, medical issues, college and approaching school costs etc). You may have to overlay some of these future changes into a future formula. What is the ACTUAL home price you should consider based on YOUR situation. A price that you can REALLY AFFORD? (Photo Pixabay)
Family deciding on ACTUAL PRICE they can afford. Photo: White 77, Pixabay
Reatlor.com in an article by Cathie Ericson addressed this issue on Jan 18, 2023 as follows,
"Long before you start asking yourself what type of house you want—condo or house? Craftsman or ranch?—you should ask yourself this pragmatic question.
After all, it’s no secret that your dream home can quickly turn into a living nightmare if you’re struggling to save for a down payment or wonder how you’ll afford your monthly payments.
These days, lenders are less likely than ever to loan you more than you can easily manage, and often require a substantial down payment. But the good news is that mortgage interest rates (are relatively low) rates (presently below 7%)" Yes, this is higher than December 2020, but going back over time, not too awful. One can refinance if rates drop.
Continuing, "Nonetheless, for your own sanity, it’s smart to take charge of coming up with an affordable figure for a down payment, and your monthly mortgage payments. That way, you can shop within your price range—because let’s face it, nothing’s more of a downer than finding your dream home only to discover after the fact that it’s out of reach.All of this means that before you start checking out houses, it’s good to determine from the get-go what home price you can afford, including what the mortgage payment would be and how much you need for a down payment. We’re on the case! Here’s how to find that magic number for you.
What can I afford and How to Calculate?
One of the most basic equations you can use to figure out home affordability is your debt-to-income ratio. This is essentially a way for you (and lenders) to compare your monthly income with how much you owe—and how a house can fit into that picture.
As a general rule, your debt-to-income ratio should remain below 36%, says David Feldberg, broker and owner of Coastal Real Estate Group in Newport Beach, CA." The rough rule of thumb is for every $1 in debt including housing one should have $3 in income (1 to 3).
Here’s how to figure it out: Calculate how much your monthly payments go toward debt—that’s things like car payments, credit cards, and student loans (rent should not be included in this calculation). Once you have that number, divide that amount by your monthly income.
Let’s say, for instance, that every month you’re paying $500 to monthly debts and pulling in $6,000. Divide $500 by $6,000 and you have a debt-to-income ratio of 0.083, or 8.3%. That’s well below 36%, but then again, you don’t own a home yet.
Once you know your income and debt, you can plug those numbers into a home affordability calculator to see how much house you can afford while still remaining below that 36% debt-to-income ratio." You can factor in those future life changes also.
How mortgage pre-approval can help
One way to get some help calculating how much house you can afford is by talking with a lender about getting a mortgage pre-approval. This is where a lender scrutinizes your finances and then agrees to loan you a certain amount of money to buy a house.
Since lenders won’t loan you more money than they think you can easily pay back, pre-approval is a good way to gauge what price you can pay for a house. However, you should also know that your pre-approved amount is often more than you might be able to afford if you factor in additional expenses.
As you can see, when you’re trying to figure out how much house you can afford, the details matter, so be sure to take all of them into account. In other words, don’t look at just your salary, or just how much your monthly mortgage payments will be.
Factor in student loan debt, mortgage insurance, down payment, and other expenses related to buying a house or your monthly bills. The clearer the picture you have of your financial commitments, the easier it will be to figure out how much house you can afford without getting in over your head."
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Meet Jeff Masich, REALTOR® and call/text 480-242-6500 or at https://ArizonaHomesLand.com to get started
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Jeff Masich
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Scottsdale including Phoenix, Tucson and Prescott metros and throughout Arizona
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