Help Line
4/8/2004You may not be ready to buy a home quite yet, but you are certainly ready to experiment with the idea. You have a lot of options to help you make an informed decision, from talking to a real estate professional--a REALTOR -- to surfing the Internet. What is the first step? Looking at homes?
Talking to an REALTOR? Securing a loan? When you are ready to make a large purchase like a home, you naturally want to sit down and determine how much money you can spend. You will quickly see that without a "ball park" figure in mind you will waste time or hit a wall in every other aspect of your home search.
Neither you nor your agent will know where to shop for a home until a price range is determined. And a loan officer can't pre-approve you or lock in a low interest rate when you find a home until it is decided how much you can spend. Give or take a few thousands dollars, it is easy to find out how much home you can afford because there is a popular formula that the majority of lenders use to qualify home buyers.
And it is published free on the Internet by the U.S. government's homefocused agency--at www.hud.gov. The Department of Housing and Urban Development is an organization that is designed to make the dream of home ownership possible for anyone who wishes to make the effort. Under HUD's umbrella is the Federal Housing Administration (FHA) which provides the formula for you to follow.
The FHA is a federal insurer that insures most conventional loans by first time borrowers so lenders will be more willing to loan money. With first time home buyers making up almost 50% of the home buying market, getting lenders to cooperate is significant. Thanks to new, higher loan limits, insured loans are now well above the average home sold in the markets throughout Ohio, making it possible for more borrowers to go conventional.
The FHA has found that most people can afford to budget 29% of their gross monthly income (before taxes) to housing expenses, but that figure may be higher or lower depending upon the borrower's total debt picture. Would you like to see how much home you can really afford to buy? That will be a two step process - beginning with your monthly gross income and then second, your revolving debt.
The FHA provides a calculator shown below.
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Although the chart above tells you how much 29% of your monthly income is, you can also arrive at the same figure by taking your gross monthly income and multiplying it by .29 or 29 percent.
The figure you get is approximately how much you can spend on a mortgage payment that includes principal, interest, property taxes and homeowner's liability insurance put in escrow with your lender. The second chart featured at the site tells you how much your monthly mortgage might be based on a home's selling price.
Keep in mind that the monthly figure from this second chart is based on a 30-year fixed mortgage and includes monthly principal and interest payments only. You will have to add in an estimated tax and insurance figure yourself. For example, if you had a 7% loan on a $100,000 home, your payment would be $699.
At 7 1/2% interest, the payment would be $734, at 8% -- $769, and so on. You can guess what the taxes and insurance might be by adding about 2 percent more for taxes and about 1 percent more for property insurance to the price of the home.
On a $100,000 home, the taxes will be $2,000 and the insurance will be about $1,000. Take the total of these two figures and divide by 12, and you'll get $250 per month. Add that to your monthly payment amount. These estimates are deliberately high, but it is better to allow too much than too little.
Remember, these charts are designed to simply estimate how much you can afford. Other factors that may affect the actual loan amount are the amount of down payment you can make and the amount of revolving debt that you have. To find out how much you can really afford, you will have to talk to a mortgage broker or direct lender about different loan plans that may better suit your situation.
You may find that with a different type of loan, such as an adjustable rate mortgage, you may be able to afford more house for temporarily lower payments. This can be a particular good thing if you don't think you will be in the home for a long time. Interest rates are low enough that you may prefer a fixed rate mortgage while you can get it, but an adjustable rate mortgage is a viable option.
If you opt for an adjustable rate loan you can, however, count on a rate change virtually every year, and most likely it will be higher by at least $50 or more dollars per month depending on the cost of your loan. When you figure out how much you can spend, whether it is $100,000, $200,000 or $1 million, then you can take the next steps -- reducing your debts, getting pre-approved for a loan, interviewing REALTORS, narrowing neighborhoods to where you would like to live, and finally, choosing the home you want to buy.