The Impact Of Property Ownership On Property Financing And Mortgage Options – If you think you’re ready to buy a home, the first question you might ask yourself is, “How much can I afford?” And answering that question means looking at many factors.
Before you make that seemingly perfect home purchase, learn how to analyze what “affordability” means. You’ll need to consider a variety of factors, from debt-to-income (DTI) ratios to mortgage rates.
The Impact Of Property Ownership On Property Financing And Mortgage Options
The first and most obvious decision point involves money. If you have enough money to buy a house in cash, you can definitely afford to buy a house now. Even if you’re not paying cash, most experts will agree that you can afford the purchase if you can qualify for a new home mortgage. But what kind of mortgage can you afford?
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A debt-to-income (DTI) standard of 43% is commonly used by the Federal Housing Administration (FHA) as a guideline for approving mortgages. This ratio determines how much the borrower can afford to pay each month. Some lenders may be more lenient or stricter depending on the real estate market and general economic conditions.
43% DTI means that all of your regular debt payments, plus your home-related expenses—mortgage, mortgage insurance, homeowner’s association fees, property taxes, homeowner’s insurance, etc. – must not exceed 43% of your monthly gross income.
For example, if your monthly gross income is $4,000, you multiply that number by 0.43 to get $1,720, which is the total amount you have to spend on debt payments. Now, let’s say you already have these monthly obligations: a minimum credit card payment of $120, a car loan payment of $240, and a student loan payment of $120 – a total of $480. This means that in theory you can afford up to $1,240 per month in additional mortgage debt and still stay within the maximum DTI. Of course, less debt is always better.
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Discrimination in mortgage lending is illegal. If you believe you have been discriminated against based on race, religion, gender, marital status, use of public assistance, national origin, disability or age, you can take action. One such step is to file a report with the Consumer Financial Protection Bureau or the US Department of Housing and Urban Development (HUD).
You should also consider your debt-to-income ratio, which calculates your income compared to the monthly debt you’ll have from just living expenses, such as mortgage payments and mortgage insurance.
Typically, lenders require that the ratio not exceed 28%. For example, if your income is $4,000 per month, you will have a hard time getting approved for $1,720 in monthly housing expenses, even if you have no other obligations. For a front-end DTI of 28%, your housing expenses must be less than $1,120.
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Why can’t you use your full debt-to-income ratio if you have no other debt? Because lenders don’t like you living on the edge. Financial misfortunes happen – you lose your job, your car breaks down, a medical disability prevents you from working for a while. If your mortgage is 43% of your income, you don’t have a lot of wiggle room when you want to or have extra expenses.
Most mortgages are long-term commitments. Note that you can make these payments every month for the next 30 years. Accordingly, you should assess the reliability of your primary source of income. You should also consider your outlook for the future and the likelihood that your expenses will increase over time.
Just because you’re approved for a mortgage up to a certain amount doesn’t mean you can actually afford the payments, so be honest about the level of financial risk you’re comfortable with.
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It’s best to put 20% of your home’s value down to avoid paying private mortgage insurance (PMI). Usually added to your mortgage payment, PMI can add $30 to $70 to your monthly mortgage payment for every $100,000 borrowed.
There could be several reasons why you don’t want to reduce your purchases by 20%. Maybe you don’t plan to stay in the home for long, have long-term plans to turn the home into an investment property, or don’t want to risk putting that much money down. If that’s the case, it’s still possible to buy a home without paying 20% down. For example, you can buy a home with only 3.5% down with an FHA loan, but there are bonuses for getting more. In addition to the aforementioned PMI avoidance, a larger down payment also means:
Being able to afford a new home today is not as important as your ability to afford it over the long term.
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While a larger down payment has many benefits, don’t completely sacrifice your emergency savings account to put more down on your home. You may find yourself in a difficult position when unexpected repairs or other needs arise.
Assuming you have your finances under control, your next consideration is the economics of the housing market—either in your current location or where you plan to move. A home is an expensive investment. Having money to buy is great, but it doesn’t answer whether the purchase makes financial sense.
One way to do this is to answer the question: Is it cheaper to rent than to buy? If buying is cheaper than renting, this is a strong argument in favor of buying.
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Likewise, it pays to think about the long-term implications of buying a home. For generations, buying a home was almost a guaranteed way to make money. Your grandparents could buy a house 50 years ago for $20,000 and sell it 30 years later for five or ten times that amount. While real estate is traditionally thought of as a safe long-term investment, recessions and other disasters can test that theory and make homeowners think twice.
During the Great Recession, when the real estate market crashed in 2007, many homeowners lost money and for many years ended up owning homes worth far less than they bought them for. If you’re buying a property with the belief that its value will increase over time, be sure to factor your mortgage interest payments, property upgrades and ongoing or regular maintenance costs into your calculations.
Likewise, there are years when real estate prices are depressed and years when they are unusually high. If the prices are so low that it’s clear you’re getting a good deal, you can take that as a sign that it might be a good time to make your purchase. In a buyer’s market, low prices increase the chances that time will work in your favor and cause your home to appreciate later. For example, if history repeats itself, we may see housing prices plummet due to the COVID-19 pandemic and its dramatic impact on the economy.
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Interest rates, which play a major role in determining the amount of monthly mortgage payments, also have years when they are high and years when they are low, which is better. For example, a 30-year mortgage (360 months) on a $100,000 loan at 3% interest would cost you $422 per month. At 5% interest, it will cost you $537 per month. At 7% it goes to $665. So if interest rates are falling, it’s wise to wait before you buy. If they are increasing, it makes sense to make your purchase sooner rather than later.
The seasons of the year can also play a role in the decision-making process. Spring is probably the best time to shop if you want to choose from the widest possible variety of homes. Part of the reason has to do with the target audience of most homes: families who are waiting to move until their kids finish the current school year but want to settle in before the new year starts in the fall.
If you want sellers who see less traffic—which makes them more flexible with pricing—winter might be better for home hunting (especially in colder climates) or the height of summer for tropical states (the off-season for your area). ), in other words). Stocks are likely to be tight, so selection may be limited, but sellers are also unlikely to see multiple offers this time of year.
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However, it’s worth noting that some savvy buyers also choose to bid around holidays, such as Christmas or Easter, in the hope that the unusual weather, lack of competition and general spirit of the season will result in a quick deal at a reasonable price. .
Although money is an important factor, many other factors can play a role in your time. Need extra space – new baby on the way, elderly relative who can’t be alone? Does the move involve changing your children’s school? If you’re selling a home you’ve lived in for less than two years, will you be hit with capital gains tax – and if so, is it worth waiting to avoid the hit?
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