Real Estate Search Direct

“I want to buy a new house – how much can I afford?”

This is a question on many first time home buyer’s minds.  Ivana Newhouse was in the same situation.

Once her fiancé, Homer, convinced her that they should own a home together when they got married, Ivana started looking at properties for sale.  But she didn’t know whether or not she could afford what she was looking at.

Ivana didn’t want to waste her time looking at properties she could not afford.  She also didn’t want to settle for something that didn’t fulfill her wants and needs if she could afford  something better.

She decided that figuring out their affordable price range was the first step in their search.

Ivana went to see Homer and asked him to work with her to determine what they could afford.

They came up with the following steps to determine their price range.

• Determine how much they could use for a down payment.
• Create financial goals.
  
• Recognize what other expenses would be involved in the process of buying a home.
• Research additional expenses that would be incurred as home owners.
• Figure out how much they could afford as a monthly mortgage payment.
• Shop for a loan and get pre-approval based on their figures.

The first part was pretty easy.  They knew how much money they had in savings that they could use for a down payment.

In addition, Ivana’s father had agreed to an interest free loan of $8000 to be repaid when they filed their 2010 income tax and received the tax credit for first time home buyers.

Next they created some financial goals.

• Homer wanted to save 10% of their income to invest for their retirement.
• Ivana wanted to have children so suggested saving money for the kids college educations.
• Homer suggested they save 5% for annual vacations.
• They both agreed that they should have a gift fund for Christmases and birthdays.

They talked to several real estate agents and asked what expenses they could expect in the home buying process.

Most of the agents were vague about these items, but one Realtor® proved to be very helpful.  She told them they could expect to pay closing costs of about 2% to 3% of the purchase price.

Many of the costs would be disclosed in the Good Faith Estimate they would receive from their lender.  These included origination fees and discount points.

Additional costs could include title insurance, escrow fees, appraisal and inspection fees, notarization, wire transfer fees, transfer taxes, pro-rated property taxes, recording fees, and a home warranty premium.

She also advised them not to forget the cost of moving.

These costs would have to be paid at closing in addition to the down payment.  This reduced the amount they would be able to reserve for down payment significantly.

Then they researched the additional expenses they could expect to pay as home owners:

• Home owner’s insurance
• Property Tax
• Private Mortgage Insurance
• Maintenance
• Utilities
• Home Owners Association Fees

Ivana and Homer  sat down and figured out their monthly income, and their expenses and put together a budget to determine exactly where their money was going and how much they could afford to spend each month on a home.

They included their financial goals and the additional home owner expenses in their budget.  Of course at this point nothing was exact, but it wasn’t written in stone either.

It is much easier to make adjustments to an imperfect plan than to create a perfect plan out of thin air.

Armed with their figures, Homer and Ivana started contacting lenders to see how much they could get a pre-approval for.

Ivana and Homer were surprised when they found that lenders would pre-approve them for a monthly payment $200 per month higher than what they had calculated they could afford.

The lenders were going strictly off the debt to income ratio and didn’t take into account other long term goals that Homer and Ivana had set for themselves.

But going to the lender still provided valuable information to determine what they could afford.  They were able to determine what interest rate they could qualify for.  They needed to know this rate and their budgeted monthly mortgage payment to calculate the maximum price they could pay for a house.

They plugged these numbers into an amortization spreadsheet to find the price range they could afford.

“I want to buy a new house – how much can I afford?”

Ivana was now prepared to answer that question confidently.

Homer and Ivana were able to determine how much they could afford to pay each month for a mortgage by creating a financial plan for their future.

Homer had heard the saying, “Failing to plan is like planning to fail.”  He was determined to avoid financial failure.

Their financial plan grew from creating a budget and setting financial goals.

If you need help creating a budget or setting goals, try Money Tree Budgeting software.  Money Tree works by helping you create a straight forward plan with all of your expenses, incomes, and goals laid out so that you have the clearest possible picture of your financial situation.

Allen Davis
RealEstateSearchDirect.com