Tuesday, 3 March 2020

So, you've outgrown your starter home, or life is taking you to a new place.

You may be able to afford a pricier home this time around, but it's important to make sure you're not signing up for house payments that will be unsustainable.

Even if you've purchased a home in the past, going through the home buying process can be just as daunting the second or third time. Take time to determine exactly how much house you can afford so you'll avoid falling in love with a home that's out of your price range. These four steps can help:

1. Get pre-qualified. Talk to your lender about getting pre-qualified for a mortgage loan. Getting pre-qualified lets you know how much you may be able to borrow to buy your new home, based on financial information you provide and a credit check. Keep in mind that the pre-qualified loan amount is merely an estimate at this point, because your income and assets aren't verified in a pre-qualification. For the estimate to be useful, you'll need to give the lender information that is as accurate as possible.

2. Use the pre-qualification figure as starting point. Think about how your financial situation may change in coming years. Do you or your co-borrower plan to cut back on work? Do you wish to purchase a car, or take on other financial commitments that could affect your ability to make mortgage payments? Remember, purchasing a home is a long-term commitment: Most mortgages last for 30 years, or at least 15.

On the other hand, if you have a large down payment or expect to get one from the sale of your current home, you may not need to borrow as much.

3. Do your own calculations. A lender's estimated figure can be helpful, but you're the one who will be making the mortgage payment. A common rule of thumb is to try to spend no more than between 28 percent and 36 percent of your income on your home.

Take time to calculate this figure by dividing the percentage amount by 100 (28/100 = 0.28), and then multiplying by your monthly income (0.28 x 6000 = 1680). That means if you bring home $6,000 per month, your house payment should be between $1,680 and $2,160.

4. Apply the range to your personal situation. It's a good idea to include home insurance and property taxes in that 28 percent to 36 percent figure, so try to settle on a mortgage payment that will include those costs and still fall below 36 percent of your income. And don't feel like you need to spend 36 percent of your income on housing, especially if you can find a house that meets your needs for less. Also, if you have extra financial obligations such as student loans or a commitment to pay for your child's college education, you may prefer a lower mortgage payment.

An online house affordability calculator can help you determine the range of home price that will result in the monthly payment you want. 

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