As you prepare to buy your first home in Montgomery County, you have already said "yes" to the biggest questions of all: "Do I want to buy a home? Do I want to buy it now?" Now it's time to ask the big one: "How much house can I afford?"
If you have gone to the bank to get pre-approval, as your real estate agent (and everyone else on the planet) will urge you to do, you may have a ball park figure for what the lender says you can afford. This may be more or less than what you had in mind.
How Much Can You Afford?
How much you can afford these days is based on the 28/36 rule. The means your housing should be 28% or less of your gross income before taxes, while your debt (not including your mortgage) should be 36% or less of your income. Based on an income of $60,000, you might be able to append about $1,400 a month on your mortgage, taxes, and insurance, but this would dip to $1,000 if you paid about $650 about for credit cards, car payment, and other loans. (Click here for a handy 28/36 mortgage calculator to compute how the 28/36% rule would work out for you.) Banks may use a magical formula based on your FICO score, but they are considering similar things: how you your debt compares to your income.
If you have household income that totals $120,000, your might be able to pay $2,800 for housing with no debt. When most people go to the lender, they put on a positive face about how their income is stable. A discussion at the kitchen table with a calculator should center around if and how you can pay a house payment approaching $3,000 if one of you were laid off or one spouse decides to stay home with the kids or an elderly parent. Will you be able the handle increased energy costs of the home is bigger than your old residence? You need to be honest and forthright with the lender about the current state of your finances, but make sure to have a Plan B or Plan C in mind.
Don't Sacrifice It All For Your Down Payment
It's true that you can reduce the amount of the loan and the monthly payment by putting more money down. This makes many people look to the two biggest pots of money they have: retirement accounts and savings. With a retirement account, large sums of money may be available, but if you are under age 59 ½ , the money is usually taxable when you remove it; the amount of the loan is included in your 36% of debt. Young home buyers often see their future retirement as decades away, but it is important to retain the account and add to it as planned even when you buy a home. The stock market, which fuels the growth of your retirement fund, may not be doing well today, but over time this will not be the case. Tapping your retirement fund is not a great idea.
Buying a home may require mobilizing all sources of funds for the downpayment, but you should not put your last dime into the downpayment. Financial analysts maintain you should have three to six months income on hand, plus about five % of the purchase price of your home as a cushion for emergencies and repairs. In addition, you may need about 3-5% of the amount of the purchase price for closing costs and moving expenses. This may mean that you need to consider buying a less expensive home or consider a loan that requires down payment, such as FHA. You can always pay more down on the principle or refinance later if paying a large downpayment would leave you without any reserve. The word from Washington is that an extension of the tax credit is likely in some form, so you can probably plan on some assistance for either your downpayment or other move-in expenses.
With home price and interest rates low, this is great time to buy an affordable house - but not to overextend yourself. Talk to Courtney Griffiths today about buying a Montgomery County home Courtney will give the most to date information about the status of the first time homebuyers credit.
