How Much House Can You Afford?
Step Two - Working Backward
Once you have calculated your monthly income, multiply it by the back ratio for your particular loan. For generic purposes, it is fairly easy to work with thirty-eight. Take 38% of your monthly income or multiply it by .38. That tells you the maximum the lender wants you to spend on your housing costs and monthly consumer debt combined.
Now get out your bills and total them up to determine what you spend monthly on debt. Do not include your auto insurance or your utilities. Just creditors. For credit cards, use the minimum required monthly payment unless it is less than ten dollars. The rest should be fairly straightforward.
Deduct that amount from the total the lender wants you to spend on housing costs and consumer debt combined. Now you know the maximum the lender wants you to spend for housing costs, unless the figure is greater than 33% of your monthly income (there are exceptions, of course).
Step Three - a Little Guesswork
The next step requires a little guesswork. If you have a vague idea of what price you might qualify for, you can estimate what your annual property taxes and homeowners insurance might cost. From there, you can easily calculate the monthly equivalent. Subtract those figures from your maximum monthly housing costs total.
If you are buying a condominium (or an area with HOA fees), subtract out an approximate figure to cover homeowners association fees. What you are left with is your maximum principal and interest payment.
The Final Step - Almost
Now you have to go to a mortgage calculator (click here) and plug in some numbers. In the "payment" area, put the figure you just calculated. Plug in the current fixed interest rate. If you are putting less than twenty percent down, add a half percent to the rate to allow for charges you will pay for mortgage insurance.
Hit the calculate button and you should have your maximum mortgage amount. Add your down payment and you know your maximum purchase price.
Maybe. You may have to do some fine-tuning to zero in on the exact figure. Plus, lenders know how to "stretch" a client a bit higher if they need it.
Advice
If the figure is less than you expected (or need), lenders know programs that will help "boost" you higher in qualifying. Plus, they will do what you just did for free, they are much more experienced at the various nuances involved, and you will have no obligation to use them as your lender.
All you have to do is pick up the yellow pages and a phone.
copyright 2000 by Terry Light and RealEstate ABC, modified 2002
