When people are ready to become homeowners, the major question is, “How much can I afford to pay for a home?”
The general rule for finding an affordable price range when house shopping is to take your gross annual income (that means before taxes) and multiply that by two and a half. If you make $60,000 a year, you should be looking at homes in the $150,000 price range.
Be forewarned, however, that your lender will probably approve you for a home in the $200,000 to $225,000 range.
DO NOT USE YOUR LENDER’S APPROVAL AMOUNT TO DETERMINE YOUR PRICE RANGE!!!!
In recent years, hundreds of thousands of home buyers have purchased homes based on their lender’s approval amount, and vast numbers of these households are now in foreclosure. Learn from their mistakes.
Use your common sense when deciding what you can afford. Consider your monthly budget. Many borrowers naively believe that the lender will not allow them to overextend themselves.
The bank will absolutely let you do that. Lenders want to lend you as much money as you can possibly afford, because the bigger the loan amount, the more money the lender makes.
They do not consider your individual monthly budget when determining your loan approval amount. They count the essentials like utilities, car payments, credit card payments, wage garnishments, but their formulas consider what someone with your income would spend on the bare essentials.
It may be very important to you that your children attend private school. Your child may be involved in an expensive sport like gymnastics. You may be helping out an elderly parent or supporting a child in college. These types of commitments may be considered non-negotiable to you, but the bank sees them as optional expenses. The lender figures that you will cut out expenses like those before you will let yourself get behind on your house payment. Therefore, the bank does not factor these types of expenses into their numbers when determining how much they will lend you.
It is up to you to determine how much house you can afford. Ideally, no more than one and a half week’s salary should go for your monthly mortgage payment. Using a yearly gross income of $60,000, the take home pay (after taxes) is about $825 per week. One and a half week’s salary would equal a $1,237 mortgage payment. The monthly mortgage payment on a house priced at $175,000 will be about $875 a month, but you must remember that escrow payments for yearly property taxes and home owner’s insurance will be added on. That will add another $200 to $600—maybe more, depending on where you live.
If this household decided to use the lender’s pre-approval amount of $200,000, their monthly mortgage payment would come to $1100 per month, and that is not even including the escrow payments. Escrow payments on a $200,000 house could add anywhere from $250 to $700 per month— more if you live in an area that has high property taxes. So, the math looks like this:
* Your budget and income say you can afford $1237 per month.
* The bank will probably approve you for at least $1500 a month.
Who do you believe — the bank or your budget? Believe your budget!!!
The bottom line is—use common sense when determining how much you can afford for a home. Consider your monthly budget commitments.
Do NOT take the bank’s word for how much you can afford. Just because a lender offers to loan you $200,000 does not mean that you should to take it!