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Ways to Determine How Much House Can You Afford

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By : Alvin Smith    99 or more times read
Purchasing a home is an important decision to make. No matter where you live or what you are looking for, you are concerned of home prices and whether or not you can actually afford to buy a house. Although the housing prices are down, it is an essential part of the buying process to know how much you can afford and if now is the time to buy. Here are some ways to help determine how much house you can manage.

You could do some simple research to see what is going on in the real estate market. This will also give you idea whether now is the right time to purchase a home. Though this information may be useful, it is not enough to help you if you have trouble in paying for the opportunities open for you. To help you determine how much house you can afford, you need to use the same approach that banks do in determining how much they will lend you.

Most banks use the same formula when deciding on how much house a family can manage. Because of the current financial mess, banks are more conservative now than in the recent past and are mainly concerned with your repaying capability. That's why before they let you buy something; they really make sure that you can afford it.

NAR's Housing Affordability Index, which measures the ability of a typical family to purchase a home, assumes that with 20 percent down payment, 25 percent of monthly household income is needed to pay for your mortgage, real estate taxes and insurance. Banks undertake a slightly more generous rate. In case that your monthly costs are around 28 percent of income gets favorable rates from banks. This formula use by most banks is called the "housing expense to income ratio."

Another determiner is called the "long-term debt to income ratio." This is where banks take a second look by checking any other household debt, such as car loans, college loans, credit card debts, and the like. Then add them into their determination. When the debt is counted up, they look for a debt-to-income ratio of not more than 36 percent. Then, the bank will decide and see if the total goes over 36 percent.

Other than the spreadsheets and fancy calculators that you can use to find out how much you can afford, you may search the Internet and find a lot of great free tools that you can use. You might like this approach as it is very easy, direct, and allows you to easily control several important factors to find out how it would affect your buying power. You can have fun with the tools as you can play with the numbers. You can put down higher or lower numbers to see different results. Just enter your income, debt if any, and your choice of down payment amount, and you will see the monthly mortgage, taxes, interest, as well as the overall price of house you can manage.
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