Home Affordability from Professional One Real Estate


		Northville Michigan Real Estate - Novi, Plymouth, Canton Real Estate

	Plymouth, Michigan

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How Much House Can You Really Afford?

Short Answer:

The concise, classic answer to this question is as follows:

Your monthly mortgage payment (including principal, interest, real estate taxes and homeowner's insurance), should not exceed 28% of your gross monthly income
Your total monthly debt (e.g., car loans, child support and alimony, student loans, condo association fees, etc.), INCLUDING your mortgage payment as per the prior point, should not exceed 36% of gross monthly income

Mortgage lenders look at your ability to repay the mortgage loan by reviewing:

Your credit history
Your monthly gross income
How much cash you can accumulate for a down payment, which is usually 10% - 20% of the sale price

For details on checking your credit history, see Credit Basics from bankrate.com.

The following chart may help you ascertain your maximum monthly debt load based on your annual gross salary:

Gross Income	28% of Monthly	36% of Monthly
$20,000	$467	$600
$30,000	$700	$900
$40,000	$933	$1,200
$50,000	$1,167	$1,500
$60,000	$1,400	$1,800
$80,000	$1,867	$2,400
$100,000	$2,333	$3,000
$150,000	$3,500	$3,500

Longer Answer:
The price you'll pay for your next home isn't just a mathematical computation. Assess your own lifestyle, deciding what amenities you'll need (and which ones you can live without to cut costs) and how long you plan to live in the home. If you're planning to live in the house less than five years, it should be looked at as an investment. Accordingly, resale value is of paramount importance. Your Professional One Real Estate agent can help you assess the strengths and weaknesses from this, and every other, perspective that relates to helping you make your final home buying decision.

To determine your target purchase price you'll need two figures:

The down payment
The mortgage amount

How much of a down payment can you afford?

Most homebuyers underestimate the down payment they can make, much to their future detriment. Aside from money you've already saved to buy the house, you might be able to borrow from family members, or better yet, convert your "non-performing assets."

What might those be? Don't scoff at holding a yard sale, taking clothes and furniture to consignment shops, or selling appreciated works of art or other valuables that no longer interest you. In our consumer-oriented culture, most of us have more of this than we realize, and much of it has value. We know a number of people that have converted such items into nice little nest eggs since the advent of eBay.

Then there's your pension and deferred compensation plans. An Individual Retirement Account can now be tapped for all of your contributions and up to $10,000 of earnings you've accumulated penalty-free for the down payment of a first home ($20,000 if you buy in Washington, D.C.). Or borrow from your 401(k) or 403(b) and pay yourself back. And if you're only a small amount away from your goal, the credit card can come in handy.

The question as you consider these options is: should you take such drastic measures to make a high down payment? If the home is a bargain, just barely out of your reach, our answer is yes. Most young couples "under buy" and soon find themselves ready to move. Frequent moving is a huge financial strain. If you find a place that will serve you for a few decades, you'll be a winner in the long run, even if you went "house-poor," for a while.

With interest rates so low right now, you might want to consider the opposite belief. You can now qualify to buy a home valued at a higher price than you could have bought only two or three years ago. If you put yourself on a tight financial budget, you leave little room for savings, investments or even your own extracurricular enjoyment. Think about your lifestyle and if the home truly is worth the tradeoffs you'll have to make.

Remember that the down payment is just the start of your costs.

Mortgage interest expenses, despite the tax deductibility aspects, cost a fortune. For every down payment dollar you make, you have a dollar less to finance. While a whopping 97 percent of new homebuyers don't put down 20%, it's costing them all. If you make a 10% down payment or less, the lender will require private mortgage insurance (PMI), which adds about another $45 a month to your mortgage payment for every $100,000 borrowed. A down payment of 20% or more won't require such insurance.

That has led some borrowers to seek out "piggyback loans," in which they essentially take out a second loan for a shorter time period to avoid the insurance payments. An example might be an "80-10-10," in which you borrow 80% of the required purchase from one lender and another 10% from a second lender. Meanwhile, you supply the remaining 10% in your down payment.

And remember that one-time closing fees may eat into your down payment, so you may need to stretch a bit no matter what.

How much of a mortgage can you afford?

You're not the only arbiter of what you can spend for a home. Your lender uses a set mathematical formula. Lenders apply two calculations to judge how much you can afford to pay monthly and base their loan limit on the lesser of the two.

Together, the two percentages are known as the "28/36 Rule." The 28% figure is simply your mortgage payment as a percentage of your household gross income. The 36% figure adds in your monthly debt payments (e.g. credit cards, auto loans, personal loans, etc.). Your lender will do both calculations and give you a mortgage based on the lower of the two results.

If you want a more expensive house, and therefore need a larger mortgage, take these steps before you apply: Pay off all of your debt so you can qualify for a larger loan and, if you can, increase your down payment. But keep in mind that lenders today will allow you to borrow far more than you can comfortably afford.

How can you buy a more expensive home?

Another way to buy a bigger house or one in a better neighborhood is to buy a house that needs some repairs. If you were born with a hammer in your hand and know how to pick a neighborhood, don't pass up all the potential profit. Fix it up and refinance it since lenders typically are very conservative in how they value homes needing repairs. But the financial rewards can be high since the government now allows you to keep up to $500,000 in profit per couple from the sale of a home every two years.

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