Home Buying in San Francisco>Question Details

Karl, Home Buyer in San Francisco, CA

What's the best way to determine how much home I can afford with high accuracy?

Asked by Karl, San Francisco, CA Mon Jul 5, 2010

Many tax calculators are highly generalized and either ask questions I do not know answers to, or do not take my personal circumstances into account. What's the best way to determine how much home I can afford with a higher degree of accuracy?

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Answers

33
Karl,
How much you can afford may not be the same as how much you should afford. As a lender and Realtor, I work with lenders to determine this regularly. Standard guidelines indicate a debt ratio of up to 45% (in some cases they will approve up to 50%). This would be your gross income multiplied by 45%, less any other credit debt, car payments, credit cards etc.
If you earn $5000 per month before taxes, 45% of this is $2250. If you owe $350 for a car payment and $50 for credit cards, your available Principle, interest tax and insurance payment would be $1850.
From here you need to figure out how much down payment your willing/able to put up and still have adequate reserves, what rate you qualify for and from there what that payment (less taxes and insurance), plus down payment equals in a house.
Of course there are other issues too. Home owners associations, special assessments, loan programs just to name a few.
While becoming educated on the process is critically important, you'll still need to rely on a professional lender to fine tune all this and give you the most accurate number.
Checking with your bank, a credit union or a mortgage broker/banker should be done for the specific details of your situation we can't be aware of in a forum like this.
The other thing to remember, just because the bank says you are qualified to buy a $1,000,000 home doesn't mean you should buy that much. Many financial guru's like Dave Ramsey would never suggest you push your limits as high as 45%. Ultimately that decision is up to you and you’ll have to live with it. Best of success in home shopping.
3 votes Thank Flag Link Sat Jul 10, 2010
You received a lot of very good information about how much home you would qualify for. It looks like you want to know how much you can AFFORD. I would recommend you talk with a reputable financial planner and/or CPA. This will give you information based on current and long range goals.
Web Reference: http://terrivellios.com
1 vote Thank Flag Link Thu Jul 15, 2010
This may surprise some agents, but most CPAs understand mortgage progams pretty darned well.

The thing that Karl needs to decide, given his personal circumstances, is what his monthly payment can be. From there, he can extrapolate how much he can borrow, and adding his down payment to that . . .
1 vote Thank Flag Link Tue Jul 6, 2010
One thing to keep in mind after meeting with a mortgage professional to get pre-approved for a loan and to find out how much you can afford. You may be approved for more money then you need. Make sure to stay within your means.

Just because you are approved for XYZ doesn't mean you will be comfortable paying that much each month.

Good luck,

Tap
1 vote Thank Flag Link Mon Jul 5, 2010
Hello Karl

You can access 20 calculators using the following link to help you be as accurate as you like. It will depend on the amount of data you provide.

http://www.oggikashi.com/calculators/Calculators.html

Just contact me if you need assistance on the required data by the calculators or If you need a list of trusted lending professionals for consultation.

Here is a link to help you with financing information:

http://www.oggikashi.com/buy/Financing.html

Best,

Oggi Kashi,
Broker Associate - DRE 1844627
Paragon Real Estate Group
Web Reference: http://www.oggikashi.com/
1 vote Thank Flag Link Mon Jul 5, 2010
Go to a lender ask " How much mortgage can I get to borrow money to buy a house?"

Take the number they give you as a maximum possible regardless but not necessarily a realistic maximum for you.

Now look at your numbers. as a simple example.
You make $1,000 a month take home income.

You spend
$100 on student loans.
$200 on a car payment,gas, and insurance.
$250 on food.
$50 for clothes and shoes.
$100 for electricity.
and $250 for rent.
You spend this every month and nothing more except for an emergency.

That takes all of your income every month except for $50. Add this to your rent ($250) and that is the most you can afford.

You know that you can only afford $300 per month for a house, taxes, house insurance, heat, repairs, trash removal, water, and so on.

Even though the bank may say you could borrow $450 it is beyond what you can really afford. You also realize you must save some money for expenses that will come up like heat so you take that from your monthly payment.
1 vote Thank Flag Link Mon Jul 5, 2010
Well, if it's your personal circumstances that make the methodology difficult, ask your CPA, they'll be able to advise you properly.
1 vote Thank Flag Link Mon Jul 5, 2010
The best way is to call a mortgage broker and get pre-qualified. It's fast and free.

Gregorio Denny
Tripoint Mortgage Group, Inc.
800-335-6897
Web Reference: http://WeFixRates.Info
1 vote Thank Flag Link Mon Jul 5, 2010
David Chiles Says:

"The above link is the best place to determine how much you can afford with the highest degree of accuracy."

That is terrible advise. A calculator does not know what the current interest rates are or what the individual's interest rate would be, so it cannot possibly qualify anyone with accuracy. Someone that is eligible for a 4.25% interest rate on a 400K loan can have a lower income than someone that can only qualify for a 5.5% rate. There is over a $300 difference in payments. A calculator does not know what programs someone would qualify for or the different guidelines required, it does not know that FHA loans add 2.25% to the financing, it cannot distinguish the difference in MI for FHA versus conventional, it cannot do Fannie Mae LLPAs that either increase or reduce cost. I find it shocking that a licensed agent would refer a client to a calculator rather than fellow licensed colleague for professional advice.
Web Reference: http://WeFixRates.Com
0 votes Thank Flag Link Fri Jul 16, 2010
Thank you for your question about affordability. According to HUD the first step in the home buying process is to determine how much you can afford. There is a great calculator for doing this located at http://www.ginniemae.gov/2_prequal/intro_questions.asp?Secti… this is the Ginnie Mae site.

The above link is the best place to determine how much you can afford with the highest degree of accuracy.
0 votes Thank Flag Link Fri Jul 16, 2010
You'll need $1,000 per month for each $100,000 worth of house you buy. This accounts for tax, insurance, and incidentals. Of course, after you pay it down, it's cut in half. This general rule gets you within $50 of monthly cost every time. Ive used it for 25 years for all my purchases. Takes 5 seconds.
0 votes Thank Flag Link Wed Jul 14, 2010
Karl,

A couple of years ago I would be able to give you ratios. With new lending rules changing every day now it is best to seek the advice of a Mortgage Broker. You will need one anyway when you choose a home. Best to find one now.
0 votes Thank Flag Link Wed Jul 14, 2010
BEST AND ONLY WAY contact a mortgage broker who will review your financial records, credit score, debt/income ratio, employment, and etc.

NO ONE CAN render an opinion unless you tender the required documents feed into formulas and "spits out" what you can afford.

Lynn911 Dallas Realtor & Consultant, Loan Officer, Credit Repair Advisor
The Michael Group - Dallas Business Journal Top Ranked Realtors
972-699-9111
http://www.lynn911.com
0 votes Thank Flag Link Tue Jul 13, 2010
Hi Karl

http://partners.leadfusion.com/leadfusion/freddiemac/home01/…

do start with the above formula and then talk to a lender.

Best Regards
Perry
Web Reference: http://www.ruthandperry.com
0 votes Thank Flag Link Mon Jul 12, 2010
Very simple--talk to your mortgage broker, they will be able to tell you in a few minutes time how much house your can afford. Best of luck to you in your search.
0 votes Thank Flag Link Mon Jul 12, 2010
Talk to the mortgage broker , just take w2 or schedule c from 1099 with you.
It will take 10 minutes and must of the time is free.
0 votes Thank Flag Link Mon Jul 12, 2010
Karl!
No choice here other than talking to a lender. It does not matter what you think you can afford... what matters is what they will lend you. It is the first step anyway. In this market, without a pre-approval from a lender.. .they will not even look at your offer. After the lender lets you know, then you decide how much of that are you want to vary from that amount.

Good Luck
Web Reference: http://www.di4homes.com
0 votes Thank Flag Link Sun Jul 11, 2010
the best way is to contact a mortgage person
0 votes Thank Flag Link Sun Jul 11, 2010
Talk to your mortgage broker ----- you should not spend more than 30% of take home pay on mortgage+taxes+insurance....Randall Hebert Houston Keller williams Realty http://www.randallhebert.com
0 votes Thank Flag Link Sun Jul 11, 2010
I am blessed to have an expert mortgage brokers who can quickly and easily let you know how much you can afford. They are honest and CONSERVATIVE! I like to use the experts in their fields to recommend to my clients. I know what I am great at.......SELLING REAL ESTATE LISTINGS............MARKETING YOUR HOME TO SELL..........AND STAGING THEM FOR SUCCESS..........WHILE PAYING ATTENTION TO THE DETAILS.. What I am not an expert at is the many options for Mortgages and what you will qualify for. Leave it to my expert Mortgage Brokers!
0 votes Thank Flag Link Fri Jul 9, 2010
Kyle brings up a good point about credit unions. The only "issue", in my experience, is that there is a lag between their stated rates and what is happening in the Mortgage Backed Securities market. Granted, many credit unions hold their own loans and are therefore not necessarily “interested” in the MBS market; nonetheless, credit unions have to compete with the MBS market from a rate perspective. This "lag time" can either hurt or help the consumer. For example, if rates are increasing on the "MBS side" the credit's union's "lag time" works in favor of the consumer as upward rate adjustments can lag. Reverse this scenario and the consumer benefit is lost.

There are other benefits of credit unions to consider as well such as reduced closing costs and longer rate lock periods. However, if professional advice is desired one might fall into the situation I touch on in #3 of my post below. If you want to make sure the person you are working with knows the basics, ask some questions regarding some of the topics found here: http://docs.Steven-Anthony.com/RateShopping-DoItRight.pdf

Best, Steve
0 votes Thank Flag Link Fri Jul 9, 2010
Skip the bank or the broker, go to the state credit union. If you dont have membership, find a friend or relative that does and go with them. Just go in asking questions. They'll explain it to you. The state isn't going to let you borrow more than you can actually afford. They are going to do extra checks so they can insure that they wont be in possession of a home when its all done, in other words, you'll have your home and they'll have your money.

When the economy tanked, you probably watched bank investments get cut in half or more... though I have money in both... my state investments didnt move... this should tell you that the credit unions are going to watch it more, make sure their investments are educated. Oh and I havent seen them ask for a bailout either.
0 votes Thank Flag Link Fri Jul 9, 2010
In every situation there are exceptions; however, for the most part I have to agree with Gregory. Big banks are NOT more advantageous than Brokers - period!

1) Try getting an Automated Underwriting System "Accept" for a Pre-Approval from a big bank. A true Pre-Approval letter with an AUS "Accept" from a Broker is an awesome Buyer advantage.

2) Try moving your big bank "Pre-Approval" to another lender when you see a better rate elsewhere. A broker has access to multiple lending sources to find the best rate when it comes to locking.

3) Talking about rate locks, try getting professional advice on when to lock your rate from a big bank. Professional Brokers I know have direct access to Mortgage Backed Securities trading in order to monitor whether trending indicates a rate lock or "float" strategy is more prudent.

4) Bank employees do not need a single DRE class to help a consumer with financing what is typically the largest financial purchase in one's life. Additionally, they are also exempt from the new educational and legal requirements of Nationwide Mortgage Licensing System.

Best, Steve
0 votes Thank Flag Link Tue Jul 6, 2010
"Getting pre-approval is the best way and it's best if you get it from a major bank. "

I beg to differ. Getting a pre-approval from a major bank carries no more weight than from a broker that has access to major banks and more. A pre-approval from BofA is just that ... from BofA and if something changes, there is no where else to go. A broker has access to multiple lenders for every scenario and as you know in the buying proces, things change. A broker's approval is no less valid than anyone another's and agents that perpetuate this myth should stop doing so; it's a disservice to their clients and 100% untrue. Also, the average LO at your "major bank" is not even licensed, nor do they have to be and certainly not under the same scrutiny to dot the "i's" and cross the "t's". Some may disagree with my opinion, but it is just that; my opinion and I've seen enough "major bank's" pre-approved clients come to me to get a quick funding after their deal blows up to back it up.

Gregorio Denny
Tripoint Mortgage Group, Inc.
800-335-6897
Web Reference: http://WeFixRates.Com
0 votes Thank Flag Link Tue Jul 6, 2010
Hello Karl,

Getting pre-approval is the best way and it's best if you get it from a major bank.

Kamal Randhawa
Broker
510-932-1066
0 votes Thank Flag Link Tue Jul 6, 2010
"I agree with many others, talk with a Mortgage Broker and get pre-approved NOT pre-qualified."

Matthew, you should educate your client's before sending them on a wild goose chase; you should know that they will not get any meaningful pre-approval in the stage this borrower is in. Without a property selected, any pre-approval is not worth the paper it's written on, so this is a pointless step that will only mislead the borrower. Until a property is selected and an offer is ready to be made, pre-approvals don't mean anything since there is no way of knowing what the property will be, or if it will even qualify. Most brokers won't even take an application without a property address due to RESPA issues. All this borrower needs at this juncture is a good evaluation of their income, assets and liabilities coupled with a verification of seasoned funds to close. With that in hand, they can begin shopping and any REALTOR that is expecting more than that, at this stage, is missing the boat. If anyone is out there pre-approving borrowers without an address, I'd be very cautious of that.
Web Reference: http://WeFixRates.Com
0 votes Thank Flag Link Tue Jul 6, 2010
I agree with many others, talk with a Mortgage Broker and get pre-approved NOT pre-qualified. Make sure when you talk to them that they pull your credit, provide them with all the paperwork and make sure it has been reviewed by an Underwriter.

This should give you the most accurate picture. Also there is no gaurantee even after this that there will be no other hurdles to cross, lenders as you know are fickle these days and the Underwriter can ask for many things later on.

also a good mortgage broker can advise you on some things to improve your credit / maximize your buying power if that is what you need.

If you need a recomendation try Ed Diaz, here is his LinkedIn page url http://www.linkedin.com/pub/ed-diaz/15/ab1/235
0 votes Thank Flag Link Tue Jul 6, 2010
Hi Karl,

Absolutely, the best way to determine your *accurate* purchasing power is to get pre-approved for mortgage financing by a local, experienced mortgage banker or broker. See below for a link to recommended lenders.

http://sfhotlist.com/2008/09/13/how-to-choose-a-mortgage-broker/

Let me know if we can help.

Talk soon,
Danielle
0 votes Thank Flag Link Tue Jul 6, 2010
Hi Karl,

A Pre-Approval from a Mortgage Broker/Banker is most definitely the best method of understanding what you can afford with high accuracy. A CPA will not be knowledgeable regarding the seemingly constant lender guideline changes that occur monthly.

The terms “Pre-Qualification” and “Pre-Approval” are used interchangeably in the RE Industry to mean the same thing – they are not. Even if it says "Pre-Approval" at the top of your "Pre-Approval" letter it may not be. If you are looking for accuracy void of surprises once you enter into contract you want to be Pre-Approved first. For the differences see: http://www.Steven-Anthony.com/default.aspx?pp=39377

There is also an informative discussion at the link below regarding the three primary conduits that you can use for your financing, and how your loan rate is determined.
http://www.trulia.com/voices/Financing/Who_has_the_mortgage_…

Best, Steve
0 votes Thank Flag Link Tue Jul 6, 2010
Karl,

Talk with a reputable lender. They will tell you and it doesn't cost anything. But keep in mind that until they have reviewed all your documentation any "approval" you get you will in reality be meaningless. We work with several lenders who are reputable, take care of business the right way, and offer different programs. If you'd like some referrals send me an email.

Best Regards,

Lance King/Owner-Managing Broker
lance@fixedrateproperties.com
415.722.5549
DRE# 01384425
0 votes Thank Flag Link Tue Jul 6, 2010
Dear Karl,

Gregorio has the best answer because it is communicating with a real person and it is free. Your CPA would be good but would not have knowledge of all the different loans out there. All realtors have access to excellent, well-qualified mortgage brokers and can give you their names and numbers. You can also find some excellent ones on my website under Resources/Mortgage Brokers/Bankers. You need to be very honest with them.

I would also call your banker and see if they can give you some sort of discount which they can do -- especially if you are a first time buyer. Then you must decide your comfort level because you might be qualified to spend more than you would want to do. No one wants you to be nervous about " that" much of a montly commitment. Once you have decided how much you want or can spend, contact a realtor who can assist you with finding the right home for you.

Cheers,

Sally
0 votes Thank Flag Link Mon Jul 5, 2010
Hi Karl,
I agree that the best way is to get pre-approval from a mortgage broker or a bank. As a Realtor from SF I can give some referrals.
Give me a call
415.948.1601
Ellie Kravets
0 votes Thank Flag Link Mon Jul 5, 2010
Your lender can give you a very good estimate taking into consideration how much money you're putting down and how much you're borrowing, what type of loan, at what interest and for how long.

Then based on where you plan to buy, he can also get an estimate of closing costs and proration of taxes.

Even better....you can also recruit the assistance of someone from the title company.

Fidelity National Title Company also has a software they call Fidelity Agent that realtors use.....and we can put together estimates using this software and can provide scenarios at different price levels, etc.

But your most accurate estimate occurs when you're in escrow and the title company has al the information they need to provide estimates that include provisions for credits, and who pays for what (transfer taxes, HOA fees, for example) in case these were negotiated with the seller.
0 votes Thank Flag Link Mon Jul 5, 2010
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