How Much Phoenix Area Home
Or Real Estate Can You Afford?

Do yourself and your family a great favor. Before shopping for a new home, make sure of how much home you can afford. Avoid the potential future stress of not being able to service a home mortgage debt and possibly facing a home or real estate foreclosure in the future.

One of the objectives of buying a new home is enhancing your lifestyle and comfort. You do not want to "stretch" your budget so tightly that there is little spendable dollars left after making mortgage payments for recreation and daily necessities.

A home should be a lucrative investment that not only will eventually produce some financial rewards, but should as well be an investment in securing a desirable, stress-free lifestyle for you and your family.

Consider Personal Affordability &
Lender's View of Affordability.

Knowing how much you can safely afford is one of the most important rules of buying a house. Keep in mind that there are two primary considerations of establishing affordability. One is what a mortgage lender thinks you can afford which will determine whether your home loan application is approved or rejected. The other consideration is how much you think you can afford while maintaining a comfortable lifestyle void of financial stress. The two considerations are not one and the same.

Mortgage Lenders Determination of Affordability.

Mortgage lenders will look at more than just your income to determine the size of the loan you can safely handle. And they will consider some creative financing options that can help boost your purchasing power. But essentially banks and lending institutions will use set criteria to determine credit worthiness and how much money they will agree to lend on the purchase of a new home or real estate.

• Your gross monthly income
• Your credit history
• The amount of your outstanding debts
• The amount of money you have available for a down payment and closing costs
• Your choice of mortgage (Adjustable Rate, Fixed, FHA, etcetera)
• Current interest rates

Mortgage lenders establish two important ratios based upon verification of the above factors.

Debt-to-Income Ratio

Most lenders apply a rule of thumb that the amount of debt you are servicing monthly such as car payments, credit card payments and etcetera should not exceed more than 36% of you gross monthly income. Some lenders may be more lenient particularly when a larger down payment is considered. FHA loans are typically more lenient.

Regardless of what the lenders "debt-to-income" ratio guideline may be, it is always wise to set your own ratio more conservatively to make debt servicing "more comfortable" giving you more flexibility with discriminate spending and future financial emergencies such as sudden disability or unexpected job loss.

Housing Expense Ratio.

Depending upon the lender and your credit history, it can be difficult to obtain a loan approval if your housing expense ratio exceeds 28 to 33% of your gross monthly income. From a personal viewpoint, it is wise to set you own affordability index closer to 25% of your gross monthly income.

Size of Down Payment Makes A Difference.

Lenders will be more lenient when setting qualifying ratios when larger down payments are made. A 20% down payment may qualify with a 33% housing expense ratio while only a 5% down payment may be held to a more strict ratio of 28%.

Test The Lender's View of Affordability.

You can test the lender's view of affordability by requesting a "loan prequalification". A prequalification is only an estimate of what a lender feels you can afford based upon certain information that you provide to the lender without verification. Although a "prequalification " is not a "formal approval", it will give you a general estimate of "budget affordability" from the lender's perspective. Usually you can get a prequalification estimate fairly quickly.

Always Maintain A Prudent Position.

Always get a Loan Pre qualification. Knowing how much a lender is likely to loan for your home or real estate purchase will give you a budget and affordability range so you can begin looking for the home satisfies lifestyle desires within your budget. There is no sense in looking at home that you cannot afford.

A prudent home buyer will set an affordability budget at a more conservative level that considers flexibility and future financial emergencies. It will lighten the "stress load". Remember that buying a home is one of the largest financial investments you will ever make. If you buy at the right price, a home can deliver a significant return on your investment. Strap yourself financially and what should have been a lucrative investment can disintegrate when least expected.

Make your affordability decisions wisely. Never "bite off more than you can comfortably handle". A professional and ethical real estate agent will help guide you in the right direction by providing advice that will help you make fully informed home buying decisions.

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