How much of American Dream YOU can affordTopic: Home buying
Perhaps it can be once for your life. You are finally ready to take the plunge and make a long-term commitment. (No, you aren't getting married.) You are going to buy your first home! Just think of it! No more rent payments, no more annoying landlords. It's a place you can call your own, and it's truly yours.
However, before you go looking for your dream home, you need to think about how much home you can comfortable afford and still have a life.
First of all, you must take a hard look at your personal finances before even considering approaching a lender. It may be painful, but you will gain an important realization of what you have going for you financially and what you may need to work on to be a success story.
The first step, figure out your gross income. This means any earned income that you can verify by pay stubs or your tax returns. You can also count lottery winnings or income from investments. If it can't be verified though, you can't count it as income for a mortgage application.
The next step is to think about your debt obligations. Gather all of your information on credit cards, student loans, car loans, personal loans or support payments to children or an ex-spouse. To figure your debt-to-income ratio, take the minimum payments on your credit cards and monthly payments for installment loans. That's when you can figure out your debt load.
So, to figure out how much you can spend per month on a home, you must realize that your mortgage payment, plus any typical taxes and fees, should not exceed 30% of your monthly income from all sources (as a rule of thumb).
On another note, if you plan to apply for your mortgage with a cosigner-whether it's your spouse, a friend or family member, you must consider that their finances will have to work into this equation as well.
In addition, your mortgage payment, taxes, fees and personal debt load shouldn't exceed more than 36% of your monthly income from all sources (ideally speaking). That way you can afford your life and still have room for some of the finer things in life. And you can also rest easier, knowing you'll be able to afford it all.
Lenders also recommend that hold off on applying for any new credit card or loan for several months before applying for your mortgage. This will help your credit rating as each inquiry on your credit report causes your FICO score to dip.
Once you figure out your monthly payment, then you can start home shopping and know what range of homes you can afford right away. The added benefit is that you won't have to look at homes that are out of your range and safe yourself the disappointment later on. A reputable realtor will help in this search as well.
Remember that your first home doesn't have to be your dream home. You have many years to work toward that dream home. Now is the time to build that strong financial future that will afford you that opportunity a few years in the future.
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