Wednesday, September 9, 2009

First Steps When You Decide To Buy Your New Home (Series)

Can you afford it?

  • Check your financials = income vs expenses
  • Create a budget
  • Decide how much you can spend per month on housing

The very first step you should take when considering to purchase a home should be an evening spent going over a detailed household budget so you can determine just how much you would be comfortable spending on housing each month.

Don't rely on anyone but yourself to come up with that figure; only you know what you can really live with. You must look at your income and expenses. Why? Because there are many factors that go into the bank's decision, from how long you've been at your job to how many credit cards you carry.

But the most important thing lenders look at, however, is your ability to meet your obligation to them, which is a function of your income and debt levels. To gauge your ability to pay, lenders look at a pair of numbers called the "housing ratio" and the "total-obligation ratio." They're not as complicated as they sound.

The first is just the percentage of your gross monthly income that you'll need to spend on housing expenses after you buy the new home. It includes your mortgage payment, taxes, insurance and maintenance. Lenders will want to see a ratio of 36% or lower.

The total-obligation ratio, meanwhile, is the portion of your income that goes to covering both your housing expenses and any other obligations, such as credit cards, car loans and child support. There, your lender will want to see a ratio of 42% or lower.

Both of these ratios are often negotiable upward.

Check out these links to find out where you stand:

How much housing can you afford worksheet 1 ;

How much housing can you afford worksheet 2? ;

How much do I qualify for?

Once you know what you can afford to spend on housing each month, play with the How much will my total mortgage payment be calculator on one of my William Raveis Real Estate Web-pages to see what price range you would be in.

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