You decided that you want to buy one of the Columbus OH homes for sale. Now let’s figure out which homes in Columbus you can afford? The bank will determine your loan amount by considering your debt ratio, the down payment required, and the interest rate you’ll have to pay.
Calculate your Debt Ratios. Take a look at your monthly gross income. This is the amount you make before any taxes and contributions are removed. Then calculate two figures called your “front-end ratio” and your “back-end ratio.”
The front-end ratio shows from the lender’s point of view what you can comfortably afford to pay each month. For instance, FHA Loans call for a 31% front end ratio. This means that, if your gross income is $4,000, your mortgage payment (including principle, interest, taxes and insurance) cannot be more than $1,240. Conventional loans use a 33% front-end ratio, so with a conventional loan you could afford up to $1,320 per month.
The back-end ratio adds your monthly debt payments to the calculation. It compares your debt to your income, and it’s the figure that really matters. FHA Loans use a 43% ratio and conventional loans use 45%. This means that, if you gross $4,000 per month, you can afford a total monthly debt load (including a home mortgage) of $1,720 for an FHA Loan or $1,800 for a conventional loan.
Using the $1,800 conventional loan back-end figure calculated above, this further means that, if you had a mortgage requiring a payment of $1,000 per month, your remaining debt load (car payment, school loan, credit cards, etc.) could not total more than $800 per month.
Remember that these are the outer boundaries of what lenders believe you can comfortably afford. Your own comfort zone may lie with a lower figure.
Down Payment
This is a figure calculated by your lender. Unlike certain closing costs, it’s not something you can negotiate for the seller to pay: you have to come up with it yourself. Depending upon the type of loan for which you qualify—and depending upon your credit score—you might have to pay anywhere between 0% – 20% down.
What Price Home Can You Afford?
Now that you know your debt ratios, you need to calculate what price of home you can comfortably consider buying.
Your monthly payment will be determined not only by the amount of money you borrow, but also by the interest rate of the loan and also the length of its term. The lower the interest rate, the lower your monthly payment. And the shorter the loan term, the higher your monthly payment.
If you know through your debt ratio calculation that you can afford, for instance, $1,000 per month for your mortgage (which has to include insurance and taxes), you can figure out how much money you can borrow up to, depending upon the loan’s interest rate and term.
Most bank websites have online mortgage calculators where you can type in the variables to try different scenarios. For instance, a $170,000 loan at 6% over 30 years will require a monthly principle and interest payment of $1,019. A $150,000 loan at 7% for 30 years will cost you $998 per month. If you’re not able to put any money down on a home, then you shouldn’t be looking at homes with selling prices higher than about $175,000. If you plan to put some money down on the property, then you can afford to go a little higher.
What’s Your Comfort Zone?
Think about how you would feel each month paying the maximum you can afford. Would it stress you out? Before you start seriously looking at homes, figure out how much you’d be comfortable paying each month. For example, if you decide that you don’t want to pay more than $900 per month, then consider either looking for a lower-priced home or providing a higher down payment.
Perhaps your best move is to talk with your Columbus real estate agent. She wants to make sure that you’re in a home you not only can afford, but that you’re also comfortable buying.
Call Susanne today at 614-975-9650 to talk about the right-priced home for you!