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Buyer's Q & A | What Can You Afford?


Q: Exactly what can I afford?

A: That depends on your income(s) and your debt(s). Lenders do not want to lend more than 28 percent of your gross income per month on a mortgage payment or more than 36 percent on debts.

Rule of Thumb is the 28/36% formulas. This is the test most lenders use to qualify applicants.

28% Test: permits you to spend no more than 28% of your gross monthly income on your total monthly housing costs, including principal, interest, taxes and insurance. Example: 28% of a $3,600 gross monthly income would qualify a buyer for a $1,008.00 monthly payment.

36% Test: covers both your PITI and long-term debts, such as regular household expenses, outstanding loans, child support/alimony, etc. Example: 36% of $3,600 would qualify for a $1,296 payment per month less monthly payments on any long-term debt.

Q: Why should I buy instead of renting?

A: Believe it or not, buying a home is not for everyone. But it is one of the best ways for most people to build financially in three different ways:

  1. Equity. By paying down that loan, your savings build equity in your home that you do not enjoy when you rent.
  2. Appreciation. While real estate markets may experience temporary downturns, homes typically appreciate in value. Over time, your wealth grows as your home becomes more valuable.
  3. Tax Savings.. The mortgage interest deduction can make home ownership very appealing.

The federal government lets you take an income tax deduction for all the interest you pay on your mortgage – thousands of dollars.

The federal government lets you take an income tax deduction for all the interest you pay on your mortgage – thousands of dollars.

Other advantages are: you can make changes and improvements to the house – it’s yours; and, you can handle the maintenance expenses and headaches.

Q: Is it smart to borrow the maximum amount I qualify for?

A: This is mostly based on your personal financial comfort. By borrowing the maximum, you ensure the highest possible tax deduction by having a higher mortgage and thus, larger interest payments. On the other hand, you could be house rich and cash poor – you have the house of your dreams, but have little money left over for anything else.

Q: What should I pay for a home?

A: The price will depend on things such as: your gross income; your down payment; closing costs and cash reserves required by the lender; your outstanding debts; your credit history; the type of mortgage you select and current interest rates.

Q: What is the debt-to-income ratio?

A: 28/36%. The first number means the maximum mortgage payment you qualify for could be up to 28% of gross income. The 36 means the maximum mortgage payment PLUS monthly debts could be up to 36% of gross income.

Q: How much down payment should I make?

A: There are advantages to both large and small down payments. Whichever you choose depends on both personal choice and your financial circumstances.

Advantages of a large down payment: less mortgage to pay off, smaller monthly payments, and a greater opportunity to find lower interest rates.

Advantages of a small down payment: less cash out of hand; a larger monthly mortgage payment means a larger tax deduction for interest.

Q: What are the best sources of cash for a down payment?

A: For first-time homebuyers this sometimes is a difficult task. Therefore, if your own bank account isn’t large enough, you have several options.

1) Gift: you can receive a gift from a relative, friend, etc.

2) Co-signer: this is a person who applies with your for a mortgage. It also means that person will take on the risks associated with the loan;

3) Borrow against a life insurance policy;

4) Borrow against a company pension plan;

5) Cash in a retirement savings plan;

6) Use your own business as collateral;

7) Loans: you can borrow from your own 401(k).


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