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What It Means to Be Able to Afford a Home

posted by Stephen Katz @ 11:47 PM
Tuesday, April 12, 2011

The three basic factors affecting your ability to afford a home are 1) the price of the home, 2) how much cash will be required, and 3) the monthly mortgage payment on the loan. As you may suspect, the three are tied together so that when one factor changes, so do the other two. Each is limited by your personal and financial situation and influenced by conditions in the market. Nevertheless, it is possible, with a little research and homework to make estimates of these factors sufficient to give you a good indication of whether you can afford to purchase a home.

The first factor is the cost of a home that will meet your needs. You will need to outline your needs and research asking prices for similar houses that are on the market. Keep in mind average negotiating room as well as typical seller concessions toward closing costs. Such concessions in lieu of a lower price, may be helpful in fitting the financing to your situation.

The second factor is the amount of cash you can afford to invest in the purchase. Despite how good an investment the home purchase turns out to be, you will not be able to access the cash you invest until you sell the house. This is likely to be at least several years, or you probably would not be thinking of buying a home. This is not like putting cash into a bank account; it is more like putting it into a certificate of deposit with a hefty penalty for early withdrawal. Nevertheless, the more you invest in cash, the less your mortgage will cost.

The last part of the affordability picture is the mortgage loan. Lenders have a maximum amount they will lend on a home, based on its market value, or sales price if lower. In most cases, they require some type of mortgage insurance or guarantee to lend more than 80 percent of value on an owner-occupied home. This mortgage insurance is not unusual, it is, in fact, used by the majority of first-timers as well as by many upgraders. Insurance is offered by private companies (i.e., private mortgage insurance) and the federal government (i.e., FHA insurance). The federal Department of Veterans Affairs (VA) offers home-loan guarantees (VA loans) as a benefit to qualified military veterans. All these insurance programs have the effect of reducing the amount of cash down payment you need to finance the purchase.

The three factors are highly connected. If you cannot make the numbers fit, you must find a cheaper home or come up with more cash. For planning purposes, you can calculate the largest loan you think you can get and the highest down payment you think you can arrange. And that will determine the most expensive house you can afford. You might also figure another estimate based on the amounts you feel comfortable borrowing and investing. That will become your baseline number. From there, you can search for homes that fit in your price range.

Stephen Katz

(770) 309-0939 (direct) or (866) 742-8400 -- For the past 18 years, Stephen Katz has built a successful business almost entirely on referrals. As your mortgage consultant throughout the home loan process, Stephen will explain the pros and cons of all available mortgage programs and help you choose the financing option that is best suited to your needs. Throughout the loan process, he will keep you informed and will respond quickly to your requests with answers and solutions. Consistently a top producer, Stephen is a Mortgage Bankers Association "Diamond" Award winner, a Georgia Mortgage "Top Gun" and has closed almost half a billion dollars in loans. Put his knowledge and experience to work for you!

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