Janis Peterson, GRI, ABR, CSP Realtor®
Philadelphia Main Line Homes and Real Estate
Montgomery, Delaware, and Chester Counties
Relocation Specialist
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Subject:
How Do You Know "How Much" House You Can Afford?
Question: How do you know "how much" house you can afford?
Answer: There are several ways to gauge how much you can afford to spend on a house. But, before you go house-hunting, get pre-qualified so you'll know in what price range you can shop.
It is not unusual for first-time buyers to be somewhat baffled about how to estimate what mortgage payment they will be able to handle each month, plus how much money they'll need for a down payment and closing costs. That's why it is a good idea to get pre-qualified through a lender before you start to look for a home. Pre-qualification lets a buyer know exactly how much a lender is willing to loan them. Obviously, with pre-qualification in hand, the buyer can save a lot of time -- and frustration.
Pre-qualification does not obligate buyers to take the loan from the lender, nor should it involve any fees (until later, when actually applying for the loan). Usually, pre-qualified buyers have an edge when making a purchase offer because the seller knows that the buyer is pre-qualified, and that there is at least one lender ready to make it happen.
When a lender pre-qualifies, they are more concerned about the buyer's paying ability than the price of the property. For this reason, lenders are interested in more than just a buyer's income. They also want to know how much existing debt a buyer has, what their on-going financial obligations happen to be, and what the buyer's monthly budget looks like.
Lenders use an established debt-to-income ratio, usually between .28 to 1 and .38 to 1, to calculate the amount of the loan they are willing to give to a buyer. For instance, a lender who uses a .38 to 1 debt-to-income ratio has determined that payments toward debt reduction, including existing debt plus new debt associated with buying a home, cannot be more than 30% of the buyer's gross monthly income.
An important factor that may influence a lender to authorize a loan with a higher debt-to-income ratio (where debt payments take a higher percentage of a buyer's income) is a larger down payment. Buyers who put down a bigger down are considered better risks because the theory is with more of a person's income included, the less likely they are to default on the loan.
Buyers usually discover that the pre-qualification process will produce a home purchase price that is roughly 2-to-3 times their gross annual income. The 2-to-3 guideline is only a general rule of thumb, however, and it doesn't take a buyer's full financial situation into consideration. Since the lender's calculations will also consider a buyer's actual debts and on-going expenses, the loan pre-qualification amount may be higher or lower.
Regardless of the price bracket a buyer targets, they should keep pre-qualification in mind. For help in obtaining pre-qualification, buyers can consult a local Realtor or lending institution.
"Real Service in Real Estate." For a personal consultation on buying or selling real estate, Janis Peterson, GRI, ABR, CSP Realtor® can be reached at (610) 642-3744, e-mail: jp4re@pahomes.com. Prudential Fox & Roach Realtors® is an independently owned and operated member of The Prudential Real Estate Affiliates, Inc.
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