Before you start looking at homes, you need to have some idea of what you can afford. It can save you much time and trouble by making certain you are looking in the correct price range.There are three main factors that will weigh into how much home you can ultimately afford:
- your monthly income (before taxes);
- long-term debts;
- cash you can accumulate for a down payment and closing costs.
Income . Lenders generally say that housing expenses should not exceed 25 percent to 28 percent of the homeowner's gross monthly income. The housing expenses include monthly mortgage principal, interest payments, property taxes and homeowner’s insurance. For Federal Housing Administration (FHA) loans, this figure is not to exceed 29 percent of the homebuyer's gross monthly income. If you have no idea of what your property taxes or homeowners insurance will be, the following median statistical meanings can be used. According to the American Housing Survey data the median annual taxes per $1,000 value averages $12. The median property insurance costs per month averages $30.You can count as income not only your steady employment but also:
- overtime bonus and commissions (average for one - two years);
- net income from self employment;
- social security, veteran's benefits and retirement;
- alimony, child support and income from public assistance programs;
- workmans's compensation or permanent disability payments;
- interest and dividend income; rental income after deducting expenses and debt payments;
- income from trusts, partnerships, professional corporations and so on.
Debts . Lenders also take into consideration your regular monthly debts and obligations: other real estate loans, installment loans (bank loans, auto loans, tuition loans, etc), revolving accounts, alimony and child support. Your housing expenses plus long-term debts should not be more than 33 percent to 36 percent of your gross monthly income. For Federal Housing Administration (FHA) loans, this figure should not to exceed 41 percent of the homebuyer's gross monthly income. Lenders usually define long-term debt as monthly expenses extending more than 10 months into the future.
It is recommended that you pay-off as much debt as possible before you apply for a mortgage.
Having the idea of what monthly mortgage payments you can afford will help you in determining the maximum loan amount you can borrow. With our Mortgage Calculators you can determine the maximum mortgage amount for loan terms you desire.
Having the idea of what monthly mortgage payments you can afford will also help you decide the right kind of mortgage for you. For example, a 15-year fixed-rate mortgage requires higher monthly payments than a 30-year loan.
Down payment . Lenders expect homebuyers to have enough money available to make the down payment - usually up to 20 percent of the asking price for the house and to pay closing costs (3 percent to 6 percent of the loan amount). You may consider the following sources for a down payment: savings, stocks and bonds, mutual funds, employee savings plans, Individual Retirement Accounts, etc. Some mortgage programs allow to use a gift of money from parents or relatives that need not be repaid or grants from a nonprofit housing assistance organizations for a part of your down payment.
If you don’t have enough money for downpayment that most lenders require, you may obtain Private Mortgage Insurance. It allows you to get a mortgage loan with a down payment as low as 5 percent. You can also consider an FHA or VA loan, or RHS program. Down payments on FHA loans can be as low as 3 percent, and closing costs can be wrapped into the mortgage, but FHA loans cannot exceed the statutory limit. RHS and VA loans usually require no down payment but they are only available for eligible applicants.
In recent years, Fannie Mae and Freddie Mac have also introduced low down payment programs.
Freddie Mac 's Affordable Lending mortgage products include:
- Affordable Gold ® 5
- Affordable Gold ® 3/2
- Affordable Gold ® 97
- Affordable Gold ® Alt 97
- Affordable Seconds
Fannie Mae offers three Community Lending products:
- Fannie Mae's Community Home Buyer's Program TM offers underwriting flexibilities that include a 5 percent down payment and no cash reserves at closing. This mortgage can be combined
with the FannieNeighbors mortgage option, which provides an exception to the maximum income limit for eligible properties in specially designated areas.
- Fannie 3/2 ® is similar to Fannie Mae's Community Home Buyer's Program, but requires fewer funds directly from the borrower. This 15- to 30-year, fixed-rate mortgage also requires a 5 percent down payment, but only 3 percent of it must come directly from the borrower's own funds. The remaining 2 percent can come from a relative; federal, state, or local government agency; nonprofit organization; employer; or nonprofit.
- Fannie 97 ® is ideal for the home buyer who has enough income to handle monthly mortgage payments, but is experiencing difficulty accumulating cash for the down payment. It only requires a 3 percent down payment from the borrower's own funds, and the borrower only needs to have one month's mortgage payment in cash savings, or reserves, after closing.
There are also four special mortgage options that lenders and nonprofit organizations can combine with the three Community Lending mortgage products to create a mortgage that is tailored more specifically to a borrower's home-buying needs:
- FannieNeighbors® is a nationwide, neighborhood-based mortgage option designed to increase homeownership and revitalization in areas designated as underserved by HUD, in low- to moderate-income or minority census tracts, or in central cities. The FannieNeighbors option adds underwriting flexibility to Fannie Mae's Community Home Buyer's Program mortgage product by removing the income limit if a property is located in one of these areas. Lenders and other housing professionals can use the Fannie Mae Property GeoCoderTM, a free, online application to determine whether a property qualifies for the FannieNeighbors option.
- Community Seconds® is a second lien mortgage that can be combined with one of Fannie Mae's Community Lending mortgage products to increase affordability. This mortgage option is typically provided by a federal, state, or local government agency; an employer; or a nonprofit organization. It may be forgivable, offer deferred payment, or other special terms.
- Lease-Purchase is an option that nonprofit organizations can use to help borrowers who have successfully managed their credit obligations in the past, but have insufficient savings for a down payment. With Lease-Purchase, nonprofit organizations can purchase homes that can be leased with an option to buy. Part of the rent payment is saved for the purpose of accumulating the down payment and closing costs needed to buy the home. The mortgage may then be assumed by the borrower from the nonprofit at a later time, usually three to five years after the initial lease date.
- Community Land Trust is an option that nonprofit organizations can use to provide and preserve long-term affordable housing for low- and moderate-income families. Typically, a nonprofit organization acquires and holds land for the benefit of a community. The community land trust retains title to the land, but sells the homes under long-term ground leases to low- and moderate-income families at affordable ground rents. A lender originates a first leasehold mortgage loan using one of Fannie Mae's three basic Community Lending mortgages, and Fannie Mae purchases the leasehold mortgage from an approved lender.
Your local government may support other homebuying programs in your area. You may be able to find out more information about local homebuying programs on your city's home page.
The Pledged Asset Mortgage allows a prospective home buyer who has sufficient income to meet monthly payments toward a home, but who cannot save the necessary down payment, to borrow up to 100 percent of the sales price when a family member pledges a stable financial asset equal to 30 percent of the loan amount.
Thus we consider the main factors that will weigh into how much home you can ultimately afford, but virtually affording a home involves more than having enough money to cover the down payment, closing costs and monthly mortgage obligations. Maintaining the overall condition of the home while you live in it and the repairs go beyond the monthly mortgage payments. You will have to pay for utilities and heat. If you are required to become a member of a neighborhood homeowner association, the dues or periodic assessments payable to the association may be a significant expense item. So, when determining how much home you can afford, make allowances for such expenditures.
According to the American Housing Survey data the median monthly cost paid for: