Tuesday, November 6, 2007

Wow - It's been a week.....affordability?

So, lots has happened in the last week or so. The Pats are still undefeated and the bottom still hasn't fallen out of the local Real Estate market.

We finally got some much needed rain too.

So, have you ever wondered how much house you can afford? Or to put it another way, how much of a mortgage can you carry?

Well, there really isn't any magic to figuring out what's affordable and what isn't. Also, there are plenty of mortgage companies around who have money to lend. Even though the national news media wants you to believe that all the mortgage companies are folding daily.

Though every ones situation is different, there are some basic tenets to affordability that are true for everyone. These are based on:
  • What is your income?
  • What is your current debt?
  • What do you have for a down payment?
  • How good is your credit?

Mortgage companies and banks will take this information and use it to calculate what it is that they are comfortable loaning to you. Historically, banks and mortgage companies hated to see their mortgage customers carrying more than approximately 35% of their income in debt.

In the not-to-distant past, we've seen mortgage companies who allowed customer mortgages and other debt creep up to 50% of income.

It doesn't take much to see that when 50 cents of every income dollar is covering debt, there's a greater chance that the borrower may end up in trouble. Even rising energy costs can be enough to upset that egg basket.

So, if you are wondering what it is that lenders want to see, and if you are a fiscally conservative person, if you are looking to purchase a home, the banks are starting to look for debt to income ratios back down near the 35% of yesteryear.

So, let's convert that to an example:

Annual Income: $100,000 or monthly that's: $8,333.33

Monthly other debt: (car, loans, etc.) $1,200

Mortgage amount that can be carried at 35% of income at 6% for 30 years fixed is approximately $290,000

Depending on your deposit, that might just translate into a two-bedroom condo in a fairly nice area.

So, look at your situation and maybe you can come up with a better understanding of what it is you can afford when it comes to buying a house.

Soon to come: Loan to Value and Appraisal vs. Assessment

- Geof

No comments: