Affordability

Real estate experts agree that the very first thing home buyers should do, before they even start looking at homes, is find out what price house or condominium they can afford. A general rule of thumb is that you can afford to buy a home that costs three times your gross annual income. There are many other factors to consider though. For example, low interest rates in the last few years have had a major impact on the home ownership rate in the United States and have encouraged more low- and moderate-income buyers to explore their home ownership possibilities. Affordability increases as mortgage interest rates decrease and many more home buyers have been able to buy.

BUYER'S TIP: Do not discuss your finances with a real estate agent unless you know, upfront, that the agent will be representing you in a real estate transaction. If the agent is working for the seller, he/she has a legal obligation to present your confidential financial data to the seller which could hurt your bargaining position.

Besides your income and the money you have available for a down payment and closing costs, a lender will consider your current debts, your credit history, and the type of mortgage you choose to determine your home loan. Your lender will want you to have two months of mortgage payments saved up as a cash reserve when you apply for a mortgage.

There are two factors that lenders look at to analyze a home buyer's application for a mortgage: ability to repay the loan and willingness to repay the loan. The ability to repay is determined by current employment and total income. Lenders prefer that borrowers have employment at the same business for at least the last two years or at least be in the same line of work for the last few years. The buyer's willingness to repay is based on how the property will be used and how previous financial debts have been paid off.

There are two basic formulas used by lenders to determine how much money buyers can afford to borrow for a new home. These formulas are called qualifying ratios because they base the amount of money you can spend on a mortgage on the relationship of your income to your expenses. The guidelines vary in leniency depending on the lender and sometimes include financial counseling programs for low- to moderate-income buyers. Generally speaking, conventional loan program guidelines state that your housing expenses should not exceed 26-28% of your gross monthly income. The ratio for FHA loans is 26-30% of the gross monthly income.

Use our How Much House Can You Afford? calculator to get a ballpark idea of your price range. Talk with a mortgage lender or mortgage broker to get a better idea of your price range and arrange for a pre approval letter.

The National Association of Mortgage Planners (www.namp.org) at 1-800-724-2004 offers these tactics for home buyers:

1. Pre-plan your home buying strategies and tactics.
2. Know your financial limits and opportunities.
3. Seek out the services of a mortgage planner.
4. Request the services of an independent appraiser who will objectively evaluate the property's value.
5. Engage a real estate licensees as your agent or consultant to guard your property and financial interests.
6. Hire the services of a home inspector who will objectively the condition of the property.
7. Consult with a knowledgeable attorney about legal matters affecting your real estate transaction.
8. Keep information about your financial abilities and buying motivations confidential.
9. Focus on protecting your equity position.
10. Review your financial goals and home loan annually.