Lenders

4 Tips to Determine How Much Mortgage You Can Afford

By knowing how much mortgage you can handle, you can ensure that home ownership will fit in your budget.

Here are six surefire ways you can get your finances in order before you buy a home.

Homeownership should make you feel safe and secure, and that includes financially. Be sure you can afford your home by calculating how much of a mortgage you can safely fit into your budget.

Instead of just taking out the biggest mortgage a lender qualifies you to borrow, consider how much you want to pay each month for housing based on your financial and personal goals.

Think ahead to major life events and consider how those might influence your budget. Do you want to return to school for an advanced degree? Will a new child add day care to your monthly expenses? Does a relative plan to eventually live with you and contribute to the mortgage?

Still not sure how much you can afford? You can use the same formulas that most lenders use, or try another of these traditional methods for estimating the amount of mortgage you can afford.

1. The general rule of mortgage affordability
As a rule of thumb, you can typically afford a home priced two to three times your gross income. If you earn $100,000, you can typically afford a home between $200,000 and $300,000.

To understand how that rule applies to your particular financial situation, prepare a family budget and list all the costs of homeownership, like property taxes, insurance, maintenance, utilities, and community association fees, if applicable, as well as costs specific to your family, such as day care costs.

2. Factor in your downpayment
How much money do you have for a downpayment? The higher your downpayment, the lower your monthly payments will be. If you put down at least 20% of the home’s cost, you may not have to get private mortgage insurance, which costs hundreds each month. That leaves more money for your mortgage payment.
The lower your downpayment, the higher the loan amount you’ll need to qualify for and the higher your monthly mortgage payment.

3. Consider your overall debt
Lenders generally follow the 28/41 rule. Your monthly mortgage payments covering your home loan principal, interest, taxes, and insurance shouldn’t total more than 28% of your gross annual income. Your overall monthly payments for your mortgage plus all your other bills, like car loans, utilities, and credit cards, shouldn’t exceed 41% of your gross annual income.

Here’s how that works. If your gross annual income is $100,000, multiply by 28% and then divide by 12 months to arrive at a monthly mortgage payment of $2,333 or less. Next, check the total of all your monthly bills including your potential mortgage and make sure they don’t top 41%, or $3,416 in our example.

4. Use your rent as a mortgage guide
The tax benefits of homeownership generally allow you to afford a mortgage payment—including taxes and insurance—of about one-third more than your current rent payment without changing your lifestyle. So you can multiply your current rent by 1.33 to arrive at a rough estimate of a mortgage payment.

Here’s an example. If you currently pay $1,500 per month in rent, you should be able to comfortably afford a $2,000 monthly mortgage payment after factoring in the tax benefits of homeownership.

However, if you’re struggling to keep up with your rent, consider what amount would be comfortable and use that for the calcuation instead.

Also consider whether or not you’ll itemize your deductions. If you take the standard deduction, you can’t also deduct mortgage interest payments. Talking to a tax adviser, or using a tax software program to do a “what if” tax return, can help you see your tax situation more clearly.

G.M. Filisko is an attorney and award-winning writer who’s owned her own home for more than 20 years. A frequent contributor to many national publications including Bankrate.com, REALTOR® Magazine, and the American Bar Association Journal, she specializes in real estate, business, personal finance, and legal topics.

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Lenders

MN Housing Values are Declining – Lenders Protect Themselves with Home Appraisals in Minnesota

There was a time when home values were going up; however, today this is not the case any more. You’ll find that even the value of twin cities real estate is going down, and this is causing things to change in the process of buying, selling, and refinancing a home. Today more and more lenders are beginning to work to protect themselves with home appraisals in the state of Minnesota and elsewhere around the country. This is a hard time for lenders and home owners alike, and it is no wonder that they are working to make sure that they are covered when they are lending money in any way. With MN housing values going very low, it is a great time to buy, but be aware that things may be a bit different for you when you try to get the loan for the property.

The Real Estate Market is Declining

Not only will you find that the real estate market is declining in the state of Minnesota, but this is a problem that is occurring around the entire country today. So many people are suddenly finding that their home value has gone down drastically and they are finding that selling their home at this time is hardly an option, since they will probably end up actually losing money on the sale. Because of this market that is declining, lenders are operating in ways that are different than ever before to make sure that they are not lending on properties that are worth less than the appraisal.

Appraisals Must Reflect Today’s Market

Today it is important that the appraisals that are done on homes are going to reflect today’s market. Home appraisals in Minnesota cannot be expected to reflect the home values of five years ago, although that may seem great. Lenders have to make sure that these appraisals actually reflect the current market. If they don’t, then there can be a problem later with the loan on the home. Lenders don’t want to end up actually lending out more money than the home is worth in today’s market, so any appraisal that is done should be sure to reflect the actual home value of the home today.

Lenders Start Going with In-House Appraisals to Protect Themselves

Because of all the changes in the market and the many foreclosures that have been occurring where lenders are losing huge amounts of money, many lenders are starting to go with in-house appraisals to help protect themselves. Too much money has been lost because they end up foreclosing on a home that is no longer even worth the amount of money that is owed on the home, which really is bad for lenders. So, they are now making sure that quality appraisals are done before they lend. While they may have taken the word of the appraisal done by a real estate company, now they often are going with their own home appraisals in Minnesota to make sure that they don’t lose on their properties.

Comparative Market Analysis

Many companies are also turning to comparative market analysis as well, which is very important when they are deciding on the home value of a specific home in a specific area. Basically a comparative market analysis actually helps to establish a price of value of the home by taking a look at various properties that are also in the same area. While lenders are still having appraisals done on homes as well, they are also using the comparative market analysis to help make the decisions on what the homes are really worth as well.

How This Affects You

So, wondering how all of this affects you. Well, you’ll find that just getting your own appraisal if you are going to purchase a home is not going to cut it anymore. You can expect lender to go ahead and do one of their own as well. Also, if you are trying to sell a home, this can affect you as well. If you are trying to get what the home was worth a few years ago out of the home, then you’ll have a problem. There is no way that these lenders are going to finance that amount of money. They will only finance the amount of money that the appraisal is today. So, this can definitely cause some interesting problems and challenges for those who are trying to work on selling a home in this market that is having a hard time lately.

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