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How Much Can I Afford?

By Kevin Whatley

Mortgage and Lending NMLS License #113781

April 06, 2008 05:37 PM

Home shoppers know to consider the impact that a new home will have on their household budget and that is called keeping your eye on the ball.

Unfortunately, most shoppers are keeping their eye on the wrong ball.

The proper way to answer the "How Much Home Can I Afford" question is to think in terms of monthly payment and not in terms of a home's listed sale price.

When a shopper considers affordability in terms of purchase price, he negates the monthly payment impact of:

Real estate taxes
Condo/management fees
Homeowner's insurance
Mortgage insurance (if applicable)
Downpayment

A hypothetical $300,000 home could have a combined payment as low as $1,800 or as high as $3,000, depending on the factors listed above.

In addition, mortgage rates change daily, so that can swing the payments either direction, too.

A smarter way to answer "How Much Home Can I Afford" is to determine a target monthly payment and then work backwards.

This way, each home is considered for its overall holding costs (i.e. mortgage, taxes, related fees) instead of its sticker price.

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Tony & Darcy Cannon

Aubrey and Associates Realty - Layton, UT

The C Team

Kevin, good post, too often buyers don't look at all of the costs involved in a home purchase, and you didn't even include maintainence costs. Which may not occur every month or year, but are costly none the less.

Apr 06, 2008 05:47 PM

Karen Anne Stone

New Home Hunters of Fort Worth and Tarrant County - Fort Worth, TX

Fort Worth Real Estate

Kevin: I would think that anyone who would have a $300,000 mortgage, and only have an $1,800 a month total house payment... including all of the items you mention... would be a foreclosure waiting to happen. This would have to be a mortgage that had negative amortization.

Apr 06, 2008 05:48 PM

Michael A. Caruso

Surterre Properties - Laguna Niguel, CA

Clearly, rates have an impact on what people can afford. And the size of an HOA fee can impact qualifications. I've never seen lenders pay attention to back end ratios like recently. It's nice to see a return to sanity.

Apr 06, 2008 05:51 PM

Anonymous

Karen:

The mortgage payment of $1800 does not necessarily need to be a neg am mortgage. An interest only mortgage would be calculated as follows:

$300,000 x 5.5% = 16,500 divided by 12 = $1375

Add in additional monthly expenses in some states and you would be over the $1800/mo mark. However, in my state of Louisiana, there is a $75,000 homestead exemption which makes property taxes much lower than your state of Texas. We end up paying it in to the state in the form of state income tax, but we have to do this whether we live in a $300,000 home or rent. This number could easily be reached with a small seller concession to buy the rate down slightly to 5.5%.

I have personally never closed a pay option ARM, because I was concerned about the negative am option. Interest only mortgages in the wrong hands can also be disastrous. These should only be used in cases of strong credit borrowers in unique situations.

Apr 07, 2008 04:01 AM

How Much Can I Afford?

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Kevin Whatley

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