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| How Much House Can You Afford? Understanding The Related Costs of Home Buying |
Before you begin your home search, it is a good idea to know how much you can afford. You don't want to fall in love with you dream
home then realize you can afford it! You should also get pre-approved for a loan. Most sellers these days required a pre-approval letter
with every offer.
First calculate the estimated mortgage payment
Several formulas exist to help determine how much a lender will allow a consumer to borrow. One of the more accurate formulas is a
front- and back-end ratio. It states that the buyer can afford as much as 28 percent of his or her gross-monthly income toward the
monthly mortgage payment, assuming that the consumer's other debt payments(credit cards, car loans, student loans, etc...) are less
than or equal to 8 percent of his or her gross-monthly income.
To better understand this formula, assume a gross-family income of $5,000 a month. The front-end ratio or maximum monthly mortgage
payment is (28 percent of $5,000) $1,400. The back-end ratio is (8 percent of $5,000) $400. Therefore, the buyer can afford a $1,400.00
monthly mortgage payment as long as monthly debt payments are less than or equal to $400. If debt payments exceed the back-end
ratio, it will reduce the monthly mortgage payment dollar for dollar. For example, if debt payments are $500, the maximum monthly
mortgage payment a person could afford would be reduced to $1,300.
Down Payment and Closing Costs
These terms refer to how much money the buyer will have to pay out of pocket and up-front to purchase a home. Down payment is
simple; it refers to the amount of money the buyers needs to invest at closing toward the price of the home. Most lenders request a down
payment of at least 20 percent of the cost. For first-time homebuyers, this may be difficult to achieve. Several programs are available and
relatively easy to qualify for that allow buyers to make down payments of as little as 3 percent of the price of the home. Consumers can
evaluate their options with the Coldwell Banker® Mortgage program or their lender.
Closing costs vary from state-to-state, city-to-city and even from home-to-home. Closing costs can include attorney fees, home inspection
costs, title search fees, bank fees, termite inspection fees and radon inspection fees, to name a few. The mortgage lender requires some
of these services and others are legally necessary depending on where the buyer lives. To better understand the necessary closing costs in
the area they are looking to buy in, consumers can contact their local Coldwell Banker office. For the sake of estimating, closing costs can
range from 1 to 5 percent or more of the value of the home.
home then realize you can afford it! You should also get pre-approved for a loan. Most sellers these days required a pre-approval letter
with every offer.
First calculate the estimated mortgage payment
Several formulas exist to help determine how much a lender will allow a consumer to borrow. One of the more accurate formulas is a
front- and back-end ratio. It states that the buyer can afford as much as 28 percent of his or her gross-monthly income toward the
monthly mortgage payment, assuming that the consumer's other debt payments(credit cards, car loans, student loans, etc...) are less
than or equal to 8 percent of his or her gross-monthly income.
To better understand this formula, assume a gross-family income of $5,000 a month. The front-end ratio or maximum monthly mortgage
payment is (28 percent of $5,000) $1,400. The back-end ratio is (8 percent of $5,000) $400. Therefore, the buyer can afford a $1,400.00
monthly mortgage payment as long as monthly debt payments are less than or equal to $400. If debt payments exceed the back-end
ratio, it will reduce the monthly mortgage payment dollar for dollar. For example, if debt payments are $500, the maximum monthly
mortgage payment a person could afford would be reduced to $1,300.
Down Payment and Closing Costs
These terms refer to how much money the buyer will have to pay out of pocket and up-front to purchase a home. Down payment is
simple; it refers to the amount of money the buyers needs to invest at closing toward the price of the home. Most lenders request a down
payment of at least 20 percent of the cost. For first-time homebuyers, this may be difficult to achieve. Several programs are available and
relatively easy to qualify for that allow buyers to make down payments of as little as 3 percent of the price of the home. Consumers can
evaluate their options with the Coldwell Banker® Mortgage program or their lender.
Closing costs vary from state-to-state, city-to-city and even from home-to-home. Closing costs can include attorney fees, home inspection
costs, title search fees, bank fees, termite inspection fees and radon inspection fees, to name a few. The mortgage lender requires some
of these services and others are legally necessary depending on where the buyer lives. To better understand the necessary closing costs in
the area they are looking to buy in, consumers can contact their local Coldwell Banker office. For the sake of estimating, closing costs can
range from 1 to 5 percent or more of the value of the home.
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