You are up at night searching the internet for the newest listings that hit the market, in your favorite neighborhood, in the school district that you have been longing for and that perfect one pops up! A shivers slides up your spine as you start to consider whether you can really afford this one and will you be able to make it work.
A good place to start with determining the affordability is to consider what a lender looks at when qualifying a candidate for a mortgage. Most times the lender will look at your gross monthly income (before taxes) and consider a suitable payment somewhere around the 30% of Gross Income or lower. Then they will look at those other debts that are on your credit report, like car payments, student loans, credit cards, etc and add the monthly payments for these to that amount they determined would be suitable for your mortgage and this amount usually has to be lower than 36-45% of your gross income. These ranges certainly depend on the lender and the type of loan you are applying for. Looking at these 2 amounts will provide you with a good starting point for what you can afford. I always hear, what if my total is over the 45%, does that mean I cannot buy a house? The answer is no, you can choose a house that has a lower mortgage payment to reduce that number below 45% or you could pay off some of those debts to keep the debt percentage below 45%.
I usually have my clients start with these percentages to get an initial price range and then determine some additional costs to determine how much they can truly afford. Mortgage lenders do not consider the cost of food, utilities, cell phone, internet, or child care in determining affordability so it is important to have a monthly budget for these amounts to determine what you spend in addition to what is on your credit card. I then have my clients look at what they bring home from their paychecks monthly and determine if all the costs that have been gathered here still leave them with money for entertainment, savings, emergency funds, etc. The range is then either reduced or expanded to create a much narrower affordability range. Following this process will make determining how much you can truly afford much easier.
If you have questions about buying or selling a home contact Rob Callaghan at 704-778-8653 or Alex Austin at 704-724-6312.