Throughout Arizona, the current market cycle is “buyer friendly” — meaning that there are more sellers than there are buyers.
This is great news if you are in the market for a home!
Many first time homebuyers are unsure of “exactly how much home they can afford”. There are few things as frustrating as finding a home that’s just perfect, only to find out you can’t afford it.
How do you avoid this frustration?
Before you head out and start looking at homes, it’s a good idea to figure out how much home you can afford. That way you won’t waste time—not to mention emotion—considering homes that are out of your price range.
So how do you know how much home you can afford? Well, basically the figure is based on three major factors:
1. How much money the lender will loan you.
2. How much money you have for the down payment and closing costs.
3. How much you are able to spend on monthly mortgage and interest payments.
In order to avoid any surprises, it’s a great idea before you begin looking for a new home to get pre-approval from your bank or lender. During the pre-approval process, your bank or mortgage lender will use information about you—things like your income, credit history, and other debt you have incurred—to determine an amount of money they are willing to lend you.
A good way to get a preliminary idea of how much home you can afford is to take this figure, and add it to the amount of money you have set aside for down payment and closing costs. For example, let’s say the bank has agreed to lend you $200,000, and you have $23,000 to put toward down payment and closing costs. You now have $223,000 to work with. Subtract closing costs—let’s say in this case they total $5,000—and the amount of home you can afford will be in the ballpark of $218,000.
The operative word, of course, is “ballpark.” That’s because you can’t take what the bank has agreed to lend you, add in your down payment money, and feel certain that this is what you can afford. Why?
Because it is the amount of your monthly payments that will really determine if you can afford a home. In other words, just because the bank is willing to lend you a certain amount of money, doesn’t mean that you can actually afford the payments. That will really depend upon how many other financial obligations you have in addition to your mortgage.
You’ve probably heard it said that a mortgage should not exceed 28 percent of your total income. But an even more accurate rule of thumb is to make sure that your entire debt-to-income ratio—what percentage of your income is taken up by debt including your mortgage, car loans, school and college loans, and credit card payments—doesn’t exceed more than 36 percent of your income.
If this is starting to concern you because you’re not good at math, no worries! There are plenty of calculators and tools designed to do the job for you. Ask you lender, or check online.
Knowing how much home you can afford before you begin shopping saves you time and effort. Remember, your dream home is one you can afford!