How Much House Can You Pay For?
by Mitch P. Truax
One of the most important things to decide BEFORE you go looking for a new house is what you can afford to pay for it. It is unfortunate that a lot of people do not do this exercise and then spend wasted hours looking for a house they cannot afford, only finding out when they apply for a mortgage.
If you understand how banks determine the mortgage you can afford by examining your income, amount of down payment and total closing costs, you will have a better concept of this calgary mortgage. Your total expenses will also be considerd, since they will affect how much income you have leftover to pay your home loan each month.
To do this, lenders use certain ratios that tell them what you will be able to afford, ratios based on income, expenses, debt, down payment and closing costs.
It is possible to calculate these costs on a worksheet, or you can contact a mortgage broker who will be happy to do it for you.
For most people, affording the deposit is the biggest barrier to purchasing a home. We are no longer in in a savings oriented society and many have a hard time saving that elusive next egg. The days of no down payment loans are gone since the credit crisis in the home mortgage market, so most people will have to count on saving a substantial amount for their down payment.
Figure at least a 10% down payment as a requirement for most banks alberta mortgage brokers. If the house you are looking for is in the range of $200,000, you will need $20,000 for a down payment and more funds for closing costs. A bank can supply you with a good faith estimate of your closing expenses.
Five thousand dollars is probably a fair estimate of the amount you will need for closing costs, so be prepared to have $25,000 in the bank. Now the bank will ask whether you can make the monthly payments. You can visit many sites on the internet that will help you calculate what you can afford for a monthly mortgage, or you can consult with a mortgage broker.
The standard rule of thumb is that your mortgae costs should not exceed 25% of your income. However, if you have inflated credit card debt, this will affect this percentage. If you are spending 25% of your income on your house, the rest is (in a perfect world) expected to be spent on utilities, food, entertainment, education and savings. If you have high credit card debt that has to be serviced, that will be deducted from your income when the bank is calculating what you can afford.
Barring high credit card debt, you can calculate that if you earn $6,000 a month, you can afford a payment of $1,500 for the mortgage, taxes and insurance. This is at least a jump off point for a shopping trip for a new house.
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