Buying Your Home - What You Can Afford
How much does my real estate agent need to know?
If you've signed an agreement with a real estate professional to act as your agent (in Colorado there is a specific document called Exclusive Right To Buy Listing Contract), they cannot share your financial information with the other party unless you give them permission to do so. If you've entered into this kind of agreement, you can safely share your maximum purchase price with your Buyer Agent.
How much should I spend on a home?
You should spend what it takes to get the home you need for you and your family. However, you don't want to be "house poor" if you can avoid it. Just because you can get approved for a loan amount doesn't mean you should spend it all. Of course, you also need to keep expectations realistic; you may have to spend a lot to get the home you want.
Talk with your lender about payment amounts and ask them to give you a price range based on a payment you are comfortable with.
How much will I spend on maintenance expenses?
Experts generally agree that you can plan on annually spend 1 percent of the purchase price of your house on repairing gutters, caulking windows, sealing your driveway and the myriad other maintenance chores that come with the privilege of homeownership. Newer homes will cost less to maintain than older homes. It also depends on how well the house has been maintained over the years.
What is the standard debt-to-income ratio?
A standard ratio used by lenders limits the mortgage payment to 28 percent of the borrower's gross income and the mortgage payment, combined with all other debts, to 36 percent of the total. The fact that some loan applicants are accustomed to spending 40 percent of their monthly income on rent -- and still promptly make the payment each time -- has prompted some lenders to broaden their acceptable mortgage payment amount when considered as a percentage of the applicant's income. Other real estate experts tell borrowers facing rejection to compensate for negative factors by saving up a larger down payment. Mortgage loans requiring little or no outside documentation often can be obtained with down payments of 25 percent or more of the purchase price.
What can I afford?
Know what you can afford is the first rule of home buying, and that depends on how much income and how much debt you have. In general, lenders don't want borrowers to spend more than 28 percent of their gross income per month on a mortgage payment or more than 36 percent on debts. It pays to check with several lenders before you start searching for a home. Most will be happy to roughly calculate what you can afford and prequalify you for a loan. The price you can afford to pay for a home will depend on six factors:
1. gross income
2. the amount of cash you have available for the down payment, closing costs and cash reserves required by the lender
3. your outstanding debts
4. your credit history
5. the type of mortgage you select
6. current interest rates
Another number lenders use to evaluate how much you can afford is the housing expense-to-income ratio. It is determined by calculating your projected monthly housing expense, which consists of the principal and interest payment on your new home loan, property taxes and hazard insurance (or PITI as it is known). If you have to pay monthly homeowners association dues and/or private mortgage insurance, this also will be added to your PITI. This ratio should fall between 28 to 33 percent, although some lenders will go higher under certain circumstances. Your total debt-to-income ratio should be in the 34 to 38 percent range.
When is the best time to buy?
Here are some frequently cited reasons for buying a house:
* You need a tax break. The mortgage interest deduction can make home ownership very appealing.
* You are not counting on price appreciation in the short term.
* You can afford the monthly payments.
* You plan to stay in the house long enough for the appreciation to cover your transaction costs. The costs of buying and selling a home include real estate commissions, lender fees and closing costs that can amount to more than 10 percent of the sales price.
* You prefer to be an owner rather than a renter.
* You can handle the maintenance expenses and headaches.
* You are not greatly concerned by dips in home values.
Where do I get information on housing market stats?
Call us at 719-896-6696 for all the market data you need to make an informed decision. If you allow us to serve you in your real estate needs, we will keep you safe.
How long do bankruptcies and foreclosures stay on a credit report?
It depends, but sometimes we can get you a loan in only a few years after your bankruptcy or foreclosure.
Bankruptcies and foreclosures can remain on a credit report for seven to 10 years. Some lenders will consider an
borrower earlier if they have reestablished good credit. The circumstances surrounding the bankruptcy can also influence a
lender's decision. For example, if you went through a bankruptcy because your employer had financial difficulties, a lender
may be more sympathetic. If, however, you went through bankruptcy because you overextended personal credit lines and
lived beyond your means, the lender probably will be less inclined to be flexible.