How Much House?

How much house can I afford?

This depends on your down payment and your income. Bankers use a somewhat flexible formula, including payments and debts, to determine how much house you can afford. You can use that formula, too. It's called the 28/36 Ratio (28% is called the Housing Ratio, 36% is called the Debt Ratio—See below for full explanation).

THE RATIOS

28% -- The Housing Ratio

According to the Federal Fannie Mae guidelines, a client should be spending no more than 28% of monthly income for housing payments. The 28% Housing Ratio is calculated by taking 28% of the borrower's gross monthly income (e.g. $50,000 a year = $4166 per month X 28% = $1166).

This housing payment includes the monthly Principal on the loan, plus Interest, Taxes and hazard Insurance (PITI).

36% -- The Debt Ratio

The Debt Ratio is 36% of total monthly income. The Debt Ratio includes the mortgage payment plus the sum of monthly payments being made on all other debts. Consider this example:

John makes $50,000 and with his new house, he will have a mortgage payment of $1000 (he could have had a payment as high as $1166 --PITI). Add his monthly car payment of $225 and a credit card payment of $65 per month. Since that's all the debt he has, the total monthly payment (housing + debts) of $1000+225+65 equals $1290. $1290 divided by his monthly income ($4166) gives us his Debt Ratio, in this case, 31%. John's housing to debt ratio is 24/31, well within the 28/36 guidelines.

Note: If a client is a bit over the guidelines, the lender will take into consideration compensating factors like excellent credit, savings or a raise in the near future. Certain new programs are available with ratios of 33/38 or even 45/45, but these are offered with restrictions, such as higher down payments.

How do I know the house I want is worth the price?

Here, the system works to protect you. Regardless of what the seller says—no banker will lend money to buy a house priced above the market value.

Property Value:

The buyer can't commit to pay more for a house than it's worth. A homeowner can build up a property with expensive restoration, unique landscaping and thousands of dollars of various amenities. However, if the houses in the neighborhood don't reflect similar investment and value, the appraisal of the dwelling will never match what's been spent.

In each individual case, your lender will rely on a professional appraisal that values your house by its type, condition and the selling price of comparable properties in the area.

Okay, I've found the dream-house, what next?

Dream house or not, the purchase must fit within your budget. Also, before signing any documents or depositing any money, consult your attorney to be certain your rights and deposit money will be properly protected.
 

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