|
| |
| |
To find out how much home you can afford most prospective home buyers begin the traditional task of putting together a budget of their income and expenses. Their two big questions are:
- How much money will I have to put toward a monthly payment?
- How much money do I need for a down payment and closing costs?
Unfortunately, this is like putting the cart before the horse.
If the situation above describes your home-buying process, stop, take a deep breath, and rethink. What your budget tells you at this stage is moot. Today it all comes down to what the lender says you can afford -- in other words, how big a mortgage the lender is willing to give you. After all, you can always borrow less than a lender's maximum (to reduce your monthly payment, for example). But, it's very hard to borrow more.
If you bought a home in the past, say 10 years ago, it may seem odd to go to a lender first, before you even do your own budgeting. But be aware that the process of buying a home has changed. Today your budget needs to come later. Your first question should be, "How big a loan (and monthly payment) can I get?" For that information, you must contact a lender directly.
Once you've found a lender, ask to get "pre-approved." You'll find out how big a monthly payment you can qualify for, the maximum size of a mortgage you can afford, and what size down payment you'll need.
Today virtually all lenders will take a look at your credit history, your income, and your assets and then, based on underwriting standards, issue you a "pre-approval" letter. It will typically state the biggest monthly payment their computers say you can afford. In most cases the lender will have gotten a credit report on you, checked with your employer, and looked at your bank and other financial statements, so this is a pre-approval commitment that you can "take to the bank."
Try a Reality Check
Now it's time to take a realistic look at your budget. What can you really afford? It's not hard. Just calculate your total spendable monthly income. That's what you get after taxes, alimony, and other amounts are taken out. Now subtract what the computer says you can afford monthly and see what's left. Can you really live on that for a month?
Remember, you can deduct the interest on your mortgage (up to very high limits) and your property taxes from your ordinary income. By adjusting your W-4 form with your employer, you can factor this in and get a higher monthly take-home paycheck. Be sure to ask your accountant.
Take the time to determine what your actual monthly living expenses are. Don't forget medicines, entertainment, eating out, and so on. What you need to decide is what you can live without, and what you absolutely must have.
Add up all of those monthly items you must have. Now compare the total to "what's left for you" after making your house payment, as determined earlier.
- If "what's left for you" is bigger, congratulations. The lender's computer was right and you can easily make those monthly payments!
- If "what you must have to live on" is bigger, whoa! You'll either have to tighten your belt more, or you'll have to reduce your monthly payment, cut back on the size of your mortgage, and purchase a smaller house. Or reconsider renting.
© 2011 Standard & Poor's Financial Communications. All rights reserved.
© 2011, Kelly Ruggles, Spokane, WA. Web site
Kelly C. Ruggles, Spokane, WA. is a fee-based financial planner located in Spokane.
Kelly C. Ruggles, Spokane, WA. President of American Reliance Group, Inc., a registered investment advisor.
Kelly Ruggles, Spokane, WA. is the author of "The Financial Playbook" for Retirement
Kelly C. Ruggles, Spokane, WA. Does not intend to provide personalized investment advice through this publication and does not represent the strategies or services discussed are suitable for any investor. Investors should consult with their financial advisors prior to making any investment decisions.
|
| |
| |
| |
|
|
