Once you've decided to purchase a new home, the next step is to calculate how much you can afford. Your price limit will depend on your current financial situation - which means you need to compare your income and expenses to determine how big a mortgage you can take on. You'll also need to calculate how much money you'll have for a down payment, since this will affect the size of the mortgage you can obtain. A small down payment will mean higher monthly mortgage payments, while a larger down payment will allow you to borrow more. When calculating how much you can afford, you must also take into account closing costs, which are normally three to five percent of the property's value.
Calculating Your Income
To calculate your income, include any verifiable regular income. Verifiable means this income must be documented in some way, such as with pay stubs or on your tax return. Unearned income such as alimony or estimates such as income from real estate or stocks can be used, as long as these sources are verifiable. At this stage you should also be thinking about how reliable your sources of income are - job security and investment security are important factors to consider here.
Calculating Your Monthly Debt
To calculate your monthly debt service, include credit card debt, loans, personal debts, and any other ongoing financial obligations. You don't need to include any debts that are scheduled to be fully paid within six months. If this will be your first home, bear in mind that there will be extra associated costs with owning property, such as property taxes and insurance. How much you pay for taxes and insurance will depend on the value of your property. Property tax rates also vary from state to state, and are usually deductible from federal and state income taxes.
Determining Your Price
After you've calculated the maximum amount of money you can borrow, add this figure to your down payment to find your price range. Remember to factor in that three to five percent for closing costs, as well.
Taxes and insurance can be calculated into your monthly mortgage payments, and the lender will then pay these bills on your behalf under a process called escrow. Using escrow for taxes and insurance is not mandatory, though, so if you wish you may take care of these expenses yourself. There are benefits and disadvantages associated with each method. Having your mortgage company escrow the money each month can bring you a little peace of mind, and it's easier to budget for fixed expenses than irregular ones like taxes. On the other hand, paying those bills yourself means you have more flexibility in case you want to change insurance companies.
Finding the Best Mortgage for
Once you've calculated your monthly income and monthly debt service, your next step is talking to mortgage professionals. Get quotes from several different lenders to find a deal that's right for you. To qualify for a home loan, your total monthly debt service should be less than 36% of your gross (before tax) monthly income.
When you're shopping for mortgage quotes, factor in both the interest rate and the length of the mortgage when you're deciding on the terms. Interest rates can be either fixed or variable, and this is one of the best reasons to shop around. Few first-time home-owners stay in their house for the full term of their mortgage, so you may be better off thinking in the short-term and going with a variable interest rate, as these tend to be lower than fixed rates for the first several years. Don't forget that mortgage interest is tax-deductible, too - and even better, there's no limit to the amount of mortgage interest you can claim on your deductions.