Thinking about buying a home … but you are not sure what you can afford.
Here are six easy steps to get you a "ball-park" figure.
Ready to get started?
When we’re done, you’ll have an idea of your desired price range — and whether you’ll qualify for a mortgage.
1. How much money do you have to work with?
You will need four numbers: gross annual income, your monthly housing expense, monthly debt payments, and proposed down payment.
Gross annual income
This is how much the earners in your household make on an annual basis, gross income before taxes & other deductions.
Monthly housing expense
This is how much you can reasonably spend each month on housing.
Monthly debt payments
Add it all up. This includes your credit cards, car payment, student loans, etc.
Down payment (minus 2%)
This is the amount of cash you’ve saved to put down on a house. A 20 percent down payment is ideal, because you won’t have to add mortgage insurance to your monthly expenses but it is definitely not the norm. There are loan programs that require as little as 3 percent down.
Don't forget to set aside some money for closing costs — the fees and expenses involved in buying a home. Closing costs vary from price point to price point. Plan on at least 2% of the homes sales price.
2. What’s your credit score?
This number can have a big impact on the interest rate banks will offer you, and in turn on how much house you can afford. Here’s the short story on what your credit score means for you:
750+ You should qualify for a variety of mortgages, with the best interest rates and the lowest fees.
680+ You’re likely to qualify, and with a good interest rate and standard fees.
600 – 680 You might qualify, but you’ll probably have fewer loan options and pay a higher interest rate and fees.
350 – 599 You probably won't qualify for a mortgage, except in some special cases.
3. What interest rate will you get?
This may be too early to nail down, but lets assume 4.5%-5%. Banks will use a variety of criteria to determine your actual interest rate.
4. What will your annual property taxes be?
Property Taxes vary a great deal sales price to sales price. You can find this out through most real estate websites and the details of an individual listing. Nationally, an average of more than $2,000 each year, in Seattle its not uncommon for it to be between $4,000-$6,000.
Here we go! Head on over to the calculator. Plug in all your numbers plus the additional fields. Use the standard 30-year loan term. Homeowners insurance might run between $400 and $1,000.
Buying a condo? Make sure to add monthly Home Owner Association (HOA) fees which often range from $300 to $450.
You have a ball-park price!
Below that, the monthly payment breakdown gives you what’s referred to as PITI (principal, interest, taxes, and insurance). That’s private mortgage insurance, required for conventional loans when the down payment is less than 20 percent.
6. One second … What’s your debt-to-income ratio?
Is your “debt-to-income ratio” under 36 percent of your gross income? If it’s more than that, you probably won’t be able to qualify for a mortgage. You’ll need to pay down some debt, or increase your income, or some of both.
This rule isn’t carved in stone & things like student loans can make this difficult for most. In certain cases, lenders will allow a debt-to-income ratio of as much as 43 percent.
Ready for next steps?
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