Home buying tip #4 Understanding How Much Home You Can Afford

Real Estate Agent with Irongate Realtors

Are you ready to roll with another home buying lesson? Good, let's get started.

Like it or not, there are 2 guidelines bankers and mortgage lenders use to determine how much loan you can afford.

The first guideline is the Payment To Income Ratio.  This guideline compares your income - or your total household income - to the amount of mortgage payment you're considering.

To calculate the "payment" part of the formula, the lender will take the mortgage payment (principal + interest) and add to it Property Taxes and Insurance.  Hence the term "PITI" (principal, interest, taxes, and insurance).

Usually lenders will loan up to 28% of your total household income.     

But before you think you're home free, there's something else you need to know...

It's called the Debt To Income Ratio.  Debt refers to ALL the major monthly payments other than your mortgage payment (PITI).  To arrive at this amount, the lender will consider...

·        Your car payment...

·        Your credit card debt and payments...

·        Any IRS liens or payments due...

·        Any other payments and debts you have (boat, 2nd home, etc.)

Then, they'll compare your total debt to your ability to make current payments with your new home loan added into the equation.

Now, here's the "stickler."  Each mortgage company sets different limits on your Debt To Income ratio.  Which is why it's critically important to find a MOTIVATED LENDER.

Don't follow the "canned" financial advice like you see on TV.  Most of that advice is "rule of thumb," and designed for the lowest credit rating and highest interest rates.

Think about this...

If you spend 2 or 3 days to find a loan that saves you $40,000 to $150,000 over it's term, your time is WELL WORTH SPENT!  Doing a little homework on your own will literally save you thousands over the term of your loan. Makes sense, doesn't it?

Well, that's it for now. Watch for next week's tip "Making An Offer To Purchase Your New Home". You're going to love this one.

Remember to call if I can assist you in any way. I'm here to help and using me as your buyers agent doesn't cost you a thing.

Comments (1)

Utah Dave
UtahDave.com Neighborhood Experts - South Jordan, UT
Homes for Sale - Utah

Hey Julie.....are the fha programs that much of a stigler that its only 28?   We can go up around 40 but.......it depends on other factors too.

May 30, 2008 03:57 PM

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