Itâ€™s really easy. You do not need to consult lenders or even Realtors. You may wish to do so but even then, you have to do your own homework first.
Here are the steps I'd use:
1. Determine your income per month in retirement. You can add any part time work you might wish to do but remember that if you do so, the work may be curtailed before the mortgage and you don't want to be in the hole in the future.
2. Determine expenses, also per month, other than housing. Medicare isn't free. Food, Car, Household, Clothing, Utilities, Heat, Life Insurance, Vacations and other entertainment, Any loan payments, A little savings for a rainy day (even seniors have them) and perhaps how much that Saturday night poker game costs you.
3. Deduct #2 from #1. Thatâ€™s what you can afford a month. There have been complaints that people have been talked into house ownership debt well over their heads. Number 3 is your own limit, regardless of what anyone else tells you. Oh, and you 'd better add to #2 the maintenance upkeep of a house.
4. Now we get to the part where you determine what your house payments will be. If you have done a great job with #'s 1,2, and 3, you know what the maximum total will be per month.
The first element is P&I (Principal and Interest on your mortgage.) The mortgage is the NET figure after any down payment. At the current interest rate of 5.75%, that number will be $5.84 per thousand dollars of mortgage per month. Divide that into the amount that you have left in #3 above and thatâ€™s roughly what you can afford. You have two other things to deduct and they are Taxes and Insurance.
Next add to that the taxes per month (annual rate divided by 12.) The annual amount is, of course, the taxes on the property you will buy.
Finally, there's Insurance. There are both homeowners Insurance and, if you do not put down 20%, Mortgage Protection Insurance. I'd budget about 4% of the value of the house for the homeowner's and 2 1/2 % of the mortgage for PMI, if you take that option. To get a real figure, you'll have to get exact quotes.
There you go, a budget for PITI, the fixed monthly bill you will face.
How much of your income can go to these expenses? Rule of thumb is 28% household debt and 36% all debt. I believe that mortgages companies may let you go higher, they certainly were in the boom times but think about how much you really want for trips warm Latin climates in the winter, etc. before you go over those limits. You already have calculated your own safe zone in #3 above.
Lots of luck!
The formula is quite simple well so it seems, this will give you a general idea to where you are as far as affordability. By the way you got great answers and I agree with all the responses. First thing first yes you first step when thinking in your biggest investment of your life is to consult with a mortgage professional he or she will guide you thru the lending maze. I like to know how things work and if you are like me this might help you a little.
Lenders have different guidelines and some are more flexible than others on this so this information is not written in stone. Fannie Mae, Freddie Mac and FHA have set some standards to what your monthly mortgage expense should be and make your home affordable. These things are called ratios and they can give you a general idea what you need or basically how much of your income you should spend on mortgage and consumer debt. The first one is called your front RATIO this will tell you how much mortgage (Principal, Interest, Taxes and Insurance you should pay a month will call this PITI). Most lenders will be ok with a 35% front ratio well thatâ€™s in a perfect world but you and I know that we donâ€™t live in a perfect world and the lenders know this too. So some lenders will accept this ratio to go as high as 40% on case by case basis donâ€™t get too excited. To get there the lender might look at a few things at times called compensating factors. Compensating factors can be defined as; how much deposit are you willing to invest on your new home, your credit scores, cash in the bank after closing, time at work and other related information as deemed necessary. The second ratio they call the back ratio, this ratio determines the amount of mortgage and consumer debt that you are able to carry based on your income. (consumer debt is your car payment, credit card payments, student loans, personal loan ect. Not your electric, gas, telephone well you get the point). The back ratio with most lenders is 45% again there is some flexibility depending on your particular situation and financial scenario.
Summary if you make $100K based on a 35% front ratio the monthly mortgage payment that you can afford or PITI should be around $2900.00 in the other hand your back ratio (PITI + Consumer debt) should not exceed a 45% so that will put you at around $3700 per month. In other words your consumer debt canâ€™t be no higher than $850 per month. I reiterate this formula will give you an idea is not written in stone lenders need to look at your credit, financial and assets to be able to determine what type of loan program and payment best suits your needs and financial situation.
I hope this information gives you a head start on your home buying process, you can always reach me at my office at 973.910.5698 good luck.
Pablo LÃ³pez, RealtorÂ® â€“ Associate
Century 21 Elite Realty, LLC.
337 Changebridge Rd
Pine Brook, NJ 07058
Office: 973.244.7980 Ext 215
It surely is a great time to buy with prices relaxes and rates low. You are right about that! Good luck to you.
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