Determining Your Price Limit When Buying

Real Estate Agent with Scott Owens Limited

When acting as a Buyers agent, I try to impress upon my clients the importance of being pre-qualified for a mortgage.  Imagine falling in love with your perfect home after searching for weeks, or even months, only to find out that you do not financially qualify to purchase it.

First, determine the costs associated with buying a home, including (but not limited to) legal fees, home inspections, deed transfer tax, fuel adjustments, etc.  These costs are generally about 3-5% of the purchase price of the home (for a more detailed list of closing costs, please see my blog "Closing Cost Guidelines for Buyers").  On top of these costs, you will need a down payment of at least 5% of the purchase price; it can be higher, depending on your lender.

Mortgages are given based on one of two methods: Gross Debt Service ratio (GDS) or Total Debt Service ratio (TDS).  GDS is generally 30 to 35% of your gross monthly income.  For example, if your household income is $90,000 annually, your gross monthly income is $7,500; this would qualify you to carry a mortgage of @ $2,250, including taxes.  Based on the same income, and accounting for other debt payments of $550 (eg. car/credit card payments), your TDS would be assessed at approximately $ 1,700.  Whichever method your lender uses, they will determine a dollar figure that they are confident you can repay comfortably.

Doing the math ahead of your home search will enable your real estate professional to target as  many properties as possible that suit your needs, and will help avoid disappointment when looking for a home.  The sooner you assess your limits, the closer you will be  to finding the home of your dreams



Comments (1)

Tom Boos
Sine & Monaghan Realtors, Real Living - Grosse Pointe Farms, MI
Providing the very best of service to Sellers and

Although it's quite tempting to "push the envelope" on purchase price in a Buyer's market, many buyers are resisting the urge to buy more house than they really need.  I've found that many buyers today are being much more conservative in their purchases in an attempt avoid being "house poor" in these uncertain economic times.

Jul 10, 2009 03:08 AM