Buying Your Home - What Can You Afford

What can I afford?
Knowing 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% of their gross income per month on a mortgage payment, or more than 36% on debts. It pays to check with several lenders before you start searching for a home. Most lenders will be happy to roughly calculate what you can afford and they can 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 that 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 28-33%, although some lenders will go higher under certain circumstances. Your total debt-to-income ratio should be in the 34-38% range.
When is the best time to buy?
There isn't any one best time to buy, as the reason for buying will vary from buyer to buyer depending on their needs and ability to purchase a home. 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 are planning 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 up to more than 10% 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. 
How much will I spend on maintenance expenses?
Experts generally agree that you can plan on annually spending 1% of the purchase price of your house on things such as repairing gutters, caulking windows, sealing your driveway and the myriad other maintenance chores that come with the privilege of home ownership. Newer homes will cost less to maintain than older homes. It also depends on how well the house has been maintained over the years by the previous owner(s).  
What is the standard debt-to-income ratio?
A standard ratio used by lenders limits the mortgage payment to 28% of the borrower's gross income and the mortgage payment, combined with all other debts, to 36% of the total. The fact that some loan applicants are accustomed to spending 40% 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 to no outside documentation can often be obtained with down payments of 25% or more of the purchase price.
How much does my real estate agent need to know?
Real estate agents would say that the more you tell them, the better they can negotiate on your behalf. However, the degree of trust you have with an agent may depend upon their legal obligation.
Agents working for buyers have 3 possible choices: They can represent the buyer exclusively, called single agency, or represent the seller exclusively, called sub-agency, or represent both the buyer and seller in a dual-agency situation. Some states require agents to disclose all possible agency relationships before they enter into a residential real estate transaction.
Here is a summary of the three basic types of relationships you can have with an agent:
  • In a traditional relationship, real estate agents and brokers have a fiduciary relationship to the seller. Be aware that the seller pays the commission of both brokers, not just the one who lists and shows the property, but also to the buyer's broker, who brings the ready, willing and able buyer to the table.
  • Dual agency exists if the same agent represents both the buyer and seller, or if two agents working for the same broker represent the buyer and seller in a transaction. a potential conflict of interest is created if the listing agent has advance knowledge of another buyer's offer. Therefore, the law states that a dual agent shall not disclose to the buyer that the seller will accept less than the list price, or disclose to the seller that the buyer will pay more than the offer price, without express written permission.
  • A buyer can also hire his or her own agent who will represent the buyer's interests exclusively. A buyer's agent usually must be paid out of the buyer's own pocket but the buyer can trust them with their financial information, knowing that it will not be transmitted to the other broker and ultimately to the seller. 
Where do I get information on housing market stats?
A real estate agent is a good source for finding out the status of the local housing market. So is your statewide association of Realtors, most of which are continuously compiling such statistics from local real estate boards. For overall housing statistics nationwide, U.S. Housing Markets regularly publishes quarterly reports on home building and home buying. Your local builders association probably gets this report. If not, the housing research firm is located in Canton, Mich.; call (800) 755-6269 for information; the firm also maintains a website. Finally, check with the U.S. Bureau of the Census in Washington, D.C.; (301) 763-2422. The census bureau also maintains a website. The Chicago Title company has also published a pamphlet, "Who's Buying Homes in America." Write to Chicago Title and Trust Family of Title Insurers, 171 N. Clark St., Chicago, IL 60601-3294.
What is Fannie Mae's low-down program?
Fannie Mae is expanding the availability of low-down-payment loans in an effort to help more people nationwide qualify for a mortgage. Two new programs will help potential buyers overcome two of the most common obstacles to homeownership: low savings and a modest income. To address many first-time buyers' struggles to save the down payment, Fannie Mae developed Fannie 97. The program provides 97% financing on a fixed-rate mortgage with either a 2- or 30-year loan term through Fannie Mae's Community Home Buyers Program. Fannie Mae's new Start-Up Mortgage will assist buyers with a 5% down payment who are at any income level. Yet applicants do not need as much income to qualify and less cash for closing than with traditional mortgages. Borrowers will receive a 30-year, fixed rate mortgage with a first-year anniversary payment that is lower than the standard fixed-rate loan. Freddie Mac, Fannie Mae's counterpart, also offers low-down-payment programs. 
How long do bankruptcies and foreclosures stay on a credit report?
Bankruptcies and foreclosures can remain on a credit report for 7-10 years. Some lenders will consider a borrower earlier if they have re-established 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, your lender may be more sympathetic. However, if you went through a bankruptcy because you overextended personal credit lines and lived beyond your means, the lender may be less inclined to be flexible. 
How do you determine the value of a troubled property?
Buyers considering a foreclosure property should obtain as much information as possible from the lender, including the range of bids expected. It is also important to examine the property. If you are unable to get inside of a foreclosure property, check with surrounding neighbors about the property's condition. It is also possible to do your own cost comparison through researching comparable properties recorded at local county recorder's and assessor's offices, or through internet sites specializing in property records.