How Much Can I Afford to Buy in Northern Colorado?
We’ve all been window shopping before. Looking for a home is no different. Sometimes we get caught up in the moment and get excited to see lavish photos of brilliant homes sitting on the Colorado frontier. But before any of us ever get serious about buying a house, we always ask ourselves one question: “Can I afford it?” It’s one of the most common questions in real estate, and though the price tag seems cut and dry, there’s a lot of math involved.
Below, you can learn what mortgage lenders look for when determining a loan amount, but I’ll also share some quick information on how to calculate your home affordability level. It’s important to do a little math on your own, because you know your situation better than anyone — and you’ll know what level you’ll be comfortable at.
What Mortgage Lenders Look At
Your mortgage loan amount will show you how much home you can afford to buy (from a lender’s standpoint). To understand how they determine this figure, here are some factors they calculate into their formula:
The mortgage lender will look at your credit score and view your history. It serves as a track record — showing them that you can pay bills regularly. In addition, they’ll pay attention to your score (similar to that of a graded test). Depending on your grade, your mortgage interest rate could be higher or lower. So, it’s important to do a free credit check and see if there’s room to improve it (if need be) before you buy a house. That way, your mortgage loan interest rate will be better and will ultimately save you money over the years.
Essentially, this is how much can you pay every month. Lenders will evaluate how much debt you have (whether it’s from credit cards or student loans, etc.) and calculate how much disposable income you have to pay a mortgage every month — which will decide the amount of the loan (i.e. the price range of real estate you can buy). The more money you bring every month, the more you’ll be allowed to borrow. To improve your capacity, try paying off other debt before venturing into real estate.
In case you can’t continue to pay your mortgage, the lender/bank will want to have collateral to take the place of the loan. For most mortgage loans, that will be your house. The lender will send an appraiser to determine the value of the house you’re buying, and make sure you are not asking for a loan on a property that isn’t worth the value. The lender is basically trying to protect themselves (and you) from buying a house that isn’t worth it.
Similar to your capacity, lenders will want to see what other income you might contribute to paying the mortgage loan — besides your primary income. These items could range from savings, investments, child support, etc. They are helpful in the loan approval because they show the lender you have another way to pay the loan in case you lose your job (primary income).
All these factors are considered when determining the loan amount and its approval. It’s best to talk with a lender before you get far down the home buying road, so you don’t suffer any setbacks that could you cost you money in the long run.
How to Calculate What You Can Afford
A lot of mortgage lenders and banks will have different opinions on what you can afford. After all, they are trying to get you to borrow the most money you can for business reasons. But if you’d like to do some math on your own, here’s a general rule all lenders use:
28% of your (gross monthly income) should be used for paying your monthly mortgage.
If you want to crunch some real numbers, let’s use an example: You’re buying a home with a 10% down payment, 30 year fixed-rate mortgage loan at 5%. Keep in mind, we’re also estimating the monthly principal, interest, property taxes, and insurance payments. Here are some charts you can print out:
Mortgage Payment Estimates
|Purchase Price of Home||10% Down Payment||Loan Amount||Monthly Mortgage Payment|
Your Comfort Zone
|Your comfortable home purchase price:||$__________________|
|Your comfortable monthly payment:||$__________________|
How Much You Can Afford to Buy
|Enter your monthly gross income (before taxes)||$____________|
|Multiply your monthly gross income x 0.36||$____________||Common guideline for the maximum monthly debt you should have (including mortgage payment)|
|Multiply your monthly gross income x 0.28||$____________||Common guideline for the maximum monthly mortgage debt you should have|
Example: Using a gross income of $50,000/yr
|Enter your monthly gross income (before taxes)||$~4,000|
|Multiply your monthly gross income x 0.36||$1,440|
|Multiply your monthly gross income x 0.28||$1,120|
Last Things to Factor In
What a lot of mortgage lenders often forget to mention are the additional and upfront costs associated with buying/owning a house. When you determine your home affordability level, make sure you add in the costs for buying the house: closing fees, down payment, inspector bills, etc. Also, keep in mind a budget for moving, utilities, and home maintenance. Most people don’t think this far down the road. Talk to your agent and see what the average costs are for living in the area — and make sure you have enough money to afford it.
If you have any questions about buying a house in the Northern Colorado area, feel free to ask us and we’ll give you a clear breakdown of what you need to know.