Determine Your Purchasing Power

Determine Your Purchasing Power

Are you thinking about buying? Figure out how much home you are qualified to buy by determining your buyer purchasing power.

Buyer purchasing power measures your ability to purchase a home funded by a mortgage. This figure fluctuates based on:

  • your income; and
  • current mortgage interest rates.

Finding a mortgage with the lowest interest rate is ideal. The interest rate is the cost of the mortgage. As the cost of the mortgage lowers, this frees up more money to either:

  • take out a bigger mortgage to buy a more expensive house; or
  • lower your monthly payment.

However, it’s also important to consider mortgage terms, such as the length of the mortgage, whether the interest rate is fixed or adjustable and whether there is a balloon payment.

Shopping for a home can be an exciting time in a borrower’s life. There are so many things to consider; how many rooms, how many bathrooms, the neighborhood, and the school district. However, perhaps the most important consideration is how much house one can afford. The general rule of thumb is that most homeowners can afford a mortgage loan that is 2-2.5 times their gross income. This means a family with a household income of $100,000 could probably afford a $200,000-$250,000 home. Of course, this is a generalization. There are other factors to take into consideration.

When lenders are considering potential buyers they look at more than just their gross income. They also look very closely at the buyer’s front-end and back-end ratios, as well as the amount of the down payment they can afford. We will take a closer look at what these factors are and why they are important.

1. Front-end ratio: The front-end ratio is the percentage of a borrower’s gross income that will go towards the monthly mortgage payment. The mortgage consists of principle, interest, taxes, and insurance. Most lenders don’t want to see the front-end ratio higher than 28%. This means that the mortgage payment should not exceed 28% of a borrower’s monthly income.

2. Back-end ratio: The back-end ratio is the percentage of one’s gross income that is required to cover debts. This includes the mortgage, credit card payments, child support and the like. Most mortgage companies would like to see this ratio stay below 36% of the borrower’s gross income.

3. Down payment: Lenders would like to see a down payment of at least 20%. A down payment of this amount will allow the buyer to skip out on paying expensive mortgage insurance.

Purchasing a home can be a very satisfying experience. It is a life-long dream for many and a great accomplishment. However, it can also be expensive, so one’s total financial situation must be taken into consideration. You must not only consider your income but also expenses, debt, lifestyle, and personality. Only after these things are carefully and completely considered will you be ready to purchase a home.

To discuss your purchasing power with a Lend Plus licensed mortgage banker, click here.

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