Determining How Much You Can Afford

22 Apr

Buying a house is really something you should be proud of. Days of hard work and over times have already been paid off. But remember that in buying your own house there are things you need to think over. If you’re one of the home buyers (especially first time home buyers) who spend their weekends visiting open houses and new model houses then it’s the time to stop it and learn to prioritize things first. Truly visiting homes for sale might be a good way to get a feel for what you want. The issue is that what you want isn’t always what you should get. Faced it and that is a fact.

So before you start looking for condos, apartments or homes for sale, it is essential to start in determining what you can afford to buy. This comes with the process of extracting all your personal expenses as well as your utilities. Let us dig deeper about what I am talking about. But first, did you know that knowing your financial capacity will help you narrow the search field so you would not waste valuable time visiting open houses which are actually not on your range.

Here’s Where You Begin

The main component in determining how much you can afford is by your debt-income ratio. In mathematics, a ratio is a correlation between two numbers of the same kind. Debt-income ratio is being widely used by lenders in order to know and determine how much mortgage debt a home buyer can handle. Debt-income is based on how much you earn and to how much debt you can afford which is express in percentage.

What’s the Paradigmatic Ratio?

Generally, mortgage lenders use a ratio of 36 percent as a metric for how high the debt-income ratio. Experts say that higher than 36 percent is too risky which actually resulted to the denial of application or a raised in the interest rate.

Let’s do the Calculations

Now to determine your total funds for paying your debts will have to try to do some calculations. You have to gather important data such as:

  • Gross income  (your total income before taxes and other expenses such as health care)
  • Metric for the ratio (.36)

What you only need to do is to simply multiply the gross income to .36 which is your metric or your debt-income ratio. Let us take an example:

15,000.00 x .36 = 5,400.00

Next is that you add all your monthly debt expenditures. This includes credit cards, car loans and others. Then we do mathematics where in we subtract the product we got from the previous equation to the total monthly debt expenditures. Let us again see an example.

So for example your total monthly debt expenditure is 2000.00 php.

5,400.00

-2,000.00

3,400.00 php (Maximum mortgage payment)

So in this simple example we determined that 3,400 is the maximum mortgage payment per month. By doing this simple and easy to do calculations you’ll have an idea on how much you can afford when it comes to buying your own property. Keep in mind that being in a situation wherein you cannot handle things is a suicide. Today being secured and guaranteed are the factors to having good and acceptable decisions especially in home buying.

Sources:

http://en.wikipedia.org/wiki/Debt-to-income_ratio


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