The Financial Aspects Of Purchasing A Home:
What Can I Afford for a House?
Before you start looking for a new home, it’s important that you know how much you can afford to pay. This will allow you to spend your valuable time looking productively at homes within your predetermined price range. You can calculate a relatively accurate figure for yourself with the following information:
$ _____ The cash you have saved to be used for this home purchase is called the down-payment.
$ _____ Plus: The amount of borrowed money you are able to arrange.
$ _____ Less: Closing costs and other “last minute” costs associated with the real estate purchase.
$ _____ Equals: Maximum Price
The Down-payment
Lending institutions usually require you to make a down-payment of at least 5% to 10% of the purchase price of the home. Lending institution policies may vary; however, generally, you should make your cash down-payment as large as possible. Your deposit for the real estate transaction may form part of your down-payment.
The Borrowed Money
Almost everyone who purchases a home borrows some of the money needed to pay for it. The easiest way to determine how much money you can borrow as a mortgage loan is to consult with one or more lending institutions. These lenders will apply standard tests, based on your family’s current income and debts, to decide the amount of money they will lend you. They will ask for financial information and perform a thorough credit check to ensure you’re able to repay a loan.
What is a Mortgage?
Obtaining a loan to finance the purchase of your home will probably require you to sign a document called a mortgage. This document will set out the terms and conditions for the loan and its repayment. If you fail to meet your debt obligations, the lender may have the right to claim your home to pay off what you still owe.
What Types of Mortgage Loans Are There?
Conventional mortgage loan:
Allows borrowing up to 75% of the purchase price or the appraised value of the home, whichever is less.
High-ratio mortgage loan:
Allows borrowing more than 75% of the purchase price or the appraised value of the home, whichever is less. But the borrower must pay a mortgage default insurance premium to protect the lender if payments are not made. Check with your lender to find out the amount of the insurance premium.
What is an Amortization Period?
The size of a mortgage loan payment is calculated as if the loan payments will be paid over 20 or 25 years. This is called the amortization period. Each payment will repay the interest due up to the payment date along with some of the principal owed. The longer the amortization period you choose, the lower the regular payment will be. The faster you repay any money borrowed by choosing a shorter amortization period, the more you reduce the total cost of borrowing.
What is a Term?
Most mortgage loan contracts only permit the regular payments to continue for a specified term which is shorter than the amortization period. The term can be as short as six months or it can be five years or more.
At the end of the term, you are required to repay the full unpaid balance. If you can’t pay the balance, it may be necessary to refinance the loan. The longer the term you choose, the longer your monthly payment remains stable. CAUTION: The lender is not obligated to renew your mortgage loan at the end of the term.
How Much Can You Afford to Pay in Mortgage Payments?
Based on Your Income:
A general guideline is to allow no more than 30% of your gross monthly income (before deductions) to make your monthly housing payments. This test of your ability to repay a mortgage loan is generally referred to as the Gross Debt Service Ratio.
Complete the following calculation to determine the approximate amount you may be able to afford for the mortgage payment, the property taxes and, where applicable, 50% of the strata maintenance fees. Some lenders will require this total maximum monthly payment also covers heating costs.
•Gross monthly income $___
•Co-signor’s gross monthly income (if applicable) $_____
•Other income (monthly) $______
•Total monthly income $______
•Multiply the Total line above by 30% to calculate your: Total monthly maximum housing payment $______
Based on your Other Financial Obligations:
If you have other monthly financial obligations, such as car or credit card payments, the lending institution will also apply the Total Debt Service Ratio test to determine the maximum mortgage loan for which you can qualify.
$ ____ Monthly housing payment
$ ____ Calculated monthly debt payments (car, credit card, etc.)
$ ____ Total monthly payment
As a general guideline the total of your monthly housing payment added to your other monthly debt payments should not exceed 40% of your monthly gross income.
The Gross Debt Service Ratio and the Total Debt Service Ratio tests protect both you and the lender by ensuring that you do not take on more debt that you can reasonably afford to repay.
Many lending institutions will prequalify you for a specific size and type of mortgage loan before you begin searching for your new home. Taking the time to apply for a pre-approved mortgage will give you the security of knowing how much you can afford to spend.
Before concluding the loan agreement, most lending institutions will require an appraisal of your selected home. The appraised value is a professional opinion of the value of the home and may differ from the purchase price you are willing to pay. The appraised value may affect the approved value of the loan. Know What Can You Afford!
Before you start looking for a new home, it’s important that you ask yourself What Can I Afford for a House? This will allow you to spend your valuable time looking productively at homes within your predetermined price range.
Many lending institutions will prequalify you for a specific size and type of mortgage loan before you begin searching for your new home. Taking the time to for a pre-approval will give you the security of knowing how much you can afford to spend.
Click the link in the video description for all the formulas, terms and information you need to determine what you can afford…