Looking at purchasing a new home is both an exciting experience and a daunting challenge. It can be fun visiting all of the homes that are on the market. It is exciting to dream about how you would set up a particular home and what features about the home you would adjust or redesign.
In addition to the fun part of looking for a new home, there are certain things that every homeowner must pay attention to that might not be so enjoyable. Included in this is calculating the amount of money that they are going to be able to afford to pay monthly for their home.
Seeing Things from the Vantage Point of a Mortgage Lender
A potential homeowner may have an idea in their head of how much money they feel comfortable spending monthly. However, this does not mean that they would qualify for a loan for this amount. Mortgage lenders have very specific formulas that they use for determining whether or not a person can afford a mortgage.
Mortgage lenders use a formula that is referred to as 28 – 36. They first take the cost of the mortgage, including any taxes and insurance that the potential homeowner will have to pay. Then they compare that to the homeowner’s gross monthly pay. Most mortgage lenders do not want the mortgage payment to represent more than 28 percent of a homeowner’s monthly pay. Then they will look at a homeowner’s total monthly debt payments. This would include credit cards, student loans, and car payments. They combine this number with the future mortgage payment and come up with a total amount of monthly debt that a homeowner would have to pay. Most mortgage lenders would prefer the total amount of debt that a homeowner would pay to be no more than 36 percent of their total gross income per month.
Determining How Much You Are Comfortable Paying
For some homeowners, the 28 – 36 rule makes sense. They feel comfortable if their debt that falls within that range. However, for other people having debt that consumes 36 percent of their total income is just not acceptable. They may only feel comfortable making lower monthly payments. So these individuals would look for a less expensive house.
It is a good idea for anyone thinking about purchasing a home to evaluate how much they are willing to spend monthly prior to beginning the home search. One reason why this is good is because it will help them narrow their search to homes that are more realistic for their financial situation. It may be a good idea for a homeowner to set their bottom price, and their top price. Then they can begin looking for homes that fall within their bottom price range and slowly work their way up. This will help them have a clearer idea in mind for what they can get for $175,000 as opposed to $275,000. It will help them find a home that they can reasonably afford and increase their joy while searching for a new home.