Loan Guide

How much house can you really afford?

Just because the bank will lend you the money doesn’t mean you should take it. Your lifestyle, your spending habits and a host of other factors should be taken into account in any home buying calculations.

The price you’ll pay for your next home isn’t just a mathematical computation. Yes, that’s how mortgage lenders and brokers consider it, but it’s not how you should do your own in-house arithmetic.

Assess your own lifestyle, deciding what amenities you’ll need (and which ones you can live without to cut costs) and how long you plan to live in the home. If you’re planning to live in the house less than five years, it should be looked at as an investment. Are you sure the home will appreciate and the tax savings will more than compensate for the extra monthly payments you’ll make as compared with a rental unit?

Consider these factors before you make the single biggest purchase of your lifetime.

What house offers the best resale value?

Before you decide to mortgage yourself to the hilt, put your fantasies aside and take a hard look at the potential resale value of the house you’re considering. Some houses are worth the expense, others are just overpriced. Time and again, the following attributes are bellwethers of enduring appreciation:

* Good location. The smallest house in the best neighborhood is more valuable than the largest house in a less desirable neighborhood.
* Easy to maintain, and not a heat hog or a repair nightmare.
* Low taxes in comparison to neighboring areas.
* A desirable floor plan. Today, that means a large family, communal areas and a large kitchen, to name a few amenities.

Homes with these attributes are available in every price range.

It’s always worth looking at houses within a wide range, at least $50,000 on either side of your target purchase price. Why? Because you never know how underpriced or overpriced a property may be or how negotiable the owners may be for the home you want.

To determine your target purchase price you’ll need two figures:

1. How much of a down payment can you afford?
2. How much can you afford to pay monthly on a mortgage?

How much of a down payment can you afford?

Most homebuyers underestimate the down payment they can make. Aside from money you’ve already saved to buy the house, you might be able to borrow from family members, or better yet, convert your “non-performing assets.”

Then there’s your pension and deferred compensation plans. An Individual Retirement Account can now be tapped for all of your contributions and up to $10,000 of earnings you’ve accumulated penalty-free for the down payment of a first home. Or borrow from your 401(k) or 403(b) and pay yourself back. Please check with your CPA or financial planner, this is not meant to be investment advice.

The question as you consider these options is, should you take such drastic measures to make a high down payment? If the home is a bargain, just barely out of your reach, my answer is yes. Most young couples “under buy” and soon find themselves ready to move. Frequent moving is a huge financial strain. If you find a place that will serve you for a few decades, you’ll be a winner in the long run, even if you went “house-poor,” for a while.

With interest rates so low right now, you might want to consider the opposite belief. You can now qualify to buy a home valued at a higher price than you could have bought only 5 or 7 years ago. If you put yourself on a tight financial budget, you leave little room for savings, investments or even your own extracurricular enjoyment. Think about your lifestyle and if the home truly is worth the tradeoffs you’ll have to make.

How much can you afford to pay monthly on a mortgage?

It used to be that there were set mathematical formulas used to determine how much of a mortgage you were able to qualify for. While that may still ring true for full-doc loans, the wide range of products available make it possible for you to get much more money than you probably should

To give you some history the calculations used are referred to as the 28/36 rule. The 28% figure is simply your mortgage payment as a percentage of your household gross income. The 36% figure adds in your monthly debt payments (e.g. credit cards, auto loans, personal loans, property tax, etc.). Lenders used to do both calculations and give you a mortgage based on the lower of the two results.

Many borrowers find that running the numbers with their own income and expenses gives a percentage that comes in over that 36% limit, which is why there are so many loan products and qualification guidelines available. We encourage borrowers to get clear on their budget and be open and honest about the maximum they feel comfortable paying for their monthly housing expenses. You know what you can handle and that- more than anything else- is the starting point from which a great lender will create a list of loan options that can work well for you.

If you want a more expensive house, and therefore need a larger mortgage, take these steps before you apply: Pay off all of your debt so you can qualify for a larger loan and, if you can, increase your down payment. But keep in mind that lenders today will allow you to borrow far more than you can comfortably afford.

How can you buy a more expensive home?

Another way to buy a bigger house or one in a better neighborhood is to buy a house that needs some repairs. If you were born with a hammer in your hand and know how to pick a neighborhood, don’t pass up all the potential profit. Fix it up and refinance it since lenders typically are very conservative in how they value homes needing repairs.

But the financial rewards can be high since the government now allows you to keep up to $500,000 in profit per couple from the sale of a home every two years.