| September 5, 2012

Determining How Much to Spend on a Home

Buyers who are shopping for a house, whether it be their first or a new home, often feel excited about the process and their new investment. There are several factors individuals weigh when exploring different properties, ranging from neighborhoods and amenities to the home’s proximity to work and schools. However, one of the largest considerations that may influence a buyer’s decision is the price of the house itself.

Knowing how much they can afford early on can help buyers not only narrow down their home search, but also avoid overpaying for their property. Taking on a larger mortgage than they can feasibly handle can quickly land new homeowners in a vicious cycle of debt that could result in foreclosure or significant financial problems. For these reasons, it’s crucial that consumers are realistic about the affordability of prospective homes.

There are several ways to avoid overspending on a property. First, it can be helpful to speak with a credit counselor or housing professional prior to getting in contact with lenders to assess the applicants’ finances, make any last-minute changes to their spending patterns and analyze their credit standing. This process may help boost borrowers’ chances of securing financing because it allows them to reverse poor behavior or correct inaccuracies on their credit report that may lower their loan approval chances.

Second, consumers should get pre-approved for a loan. During this process, lenders will tell consumers the maximum amount they may borrow based upon their debt-to-income ratio, Fox Business reports. However, buyers should be careful and understand the calculations lenders have used to come up with this figure. Most banks will set the debt-to-income ratio at 45 to 50 percent, but spending this amount on a mortgage does not leave a great deal of income for savings, building retirement funds, covering bills and accomplishing other financial goals. Instead, most housing professionals discourage consumers from spending more than 28 percent of their take-home pay on their monthly mortgage payments. For this reason, homeowners should understand that although they may qualify for a large loan, it may be more financially beneficial to purchase a home for less than this amount.

Lastly, consumers should focus on saving as much as possible for the down payment, preferably 20 percent or higher. Putting down at least that amount will exempt owners from being forced to purchase private mortgage insurance. Further, the more individuals put down during the purchase, the lower their mortgage payments will be going forward.

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