Kitchen Table Real Estate:
How much of a house can I afford?
Hello All. Ok, so now that you have an easy to follow home buying road map, I will show you how to make the home buying process a fun experience. How? BY BEING PREPARED.
Buying a house is the largest financial investment most people will make. Because of that, the process can be stressful. Why? Because most buyers go through the process not knowing what they should expect.
So before you start, you should be able to answer YES to the following three questions:
- The bank who will loan you the money to buy your house will want to know if you can pay them back. Do you have a steady job with a regular income?
- They also want to know how good you are at paying your bills on time. Is your credit score report above 700? (If it’s not, but it’s over 650 it might work, but you will probably have to pay more than five per cent for your down payment).
- If you are looking for a house in the Sioux lookout area with 2-3 bedrooms, during the last two years 80 houses were sold with this criteria. The average price was around $250,000. Under normal conditions you will need five per cent or $12,500 as a minimum down payment, plus approximately another three per cent or $7500 for your closing costs. Grant total = $20,000. Do you have this money saved?
Did you answer yes to the three questions? Good! You my friend, look like a New Home Owner in the making.
So let’s see how much house you can afford? As a rule of thumb, your monthly mortgage payment should not exceed one third of your after tax monthly income. Otherwise your payment might be too high to pay for your other expenses such as food, car payment, gas, cell phone, clothing, electricity …
The banks will calculate two things to figure out how much you can borrow, your GDS (Gross Debt Service ratio) and your TDS (Total Debt Service ratio). They will calculate your GDS this way: (Mortgage payments + Property taxes + Heating Costs) / Your Income.
Here is an example for a $250,000 house: Your monthly mortgage payments will be around $1200.
Your monthly municipal taxes for Sioux Lookout will be around $4800 /12 = $400 per month.
And your heating cost for an electrically heated house around $2400 /12 = $200 per month.
($1200 + $400 + $200) / $5800 = .31 or 31 per cent. The result should be less than 32 per cent.
So to qualify for a $250,000 house you need a minimum of $5800 after tax monthly income.
The TDS is basically calculated the same way but it takes into account your debts (Car payment, student loan, credit cards and other debts) and the result should be under .4 or 40%
So if you do the math, your maximum monthly debt payment cannot be more $500 to qualify for a $250,000 house with a $5800 after tax monthly income.
This is a simple explanation of how much you need to buy a house. There is much more to it, but you need not worry, your Realtor will explain everything to you. Remember there are no ‘’dumb questions’’ in Real estate.
OK! Now you can start. Call your Agent (Your Rock. Remember?) They will be the Captain of your team (Mortgage Broker, Home inspector, Real estate lawyer) and will guide you in every step of the process.
Happy house hunting.
Next time we will explore, what is the perfect house for you.