Most Silver Lake Realtors will tell you that purchasing your first home is one of the most important and exciting financial milestones of your life. Before you get going with a Silver Lake, CA Real Estate Agent, you need to have a better sense of a realistic budget.
Just how much house can you afford? You can figure out how much house you can afford by following three seamless rules based on various percentages of your monthly income.
The Rules Of Home Affordability
Mortgage lenders use something called qualification ratios to determine how much they will lend to a borrower. Although each lender uses slightly different ratios, most are within the same range. Some lenders will lend a bit more, some a bit less. We have taken average qualification ratios to come up with our three rules of home affordability.
Our Silver Lake Real Estate Agents say your maximum mortgage payment (rule of 28): The golden rule in figuring out how much home you can afford is that your monthly mortgage payment should not exceed 28 percent of your gross monthly income (your income before taxes are taken out).
Your maximum total housing payment (rule of 32): The next rule stipulates that your total housing payments (including the mortgage, homeowner’s insurance, and private mortgage insurance [PMI], association fees, and property taxes) should not exceed 32 percent of your gross monthly income.
That typically means, for the same couple, their total monthly housing payment can’t be more than $2,133 per month.
Your maximum monthly debt payments (rule of 40): Finally, your total debt payments, including your housing payment, your auto loan or student loan payments, and minimum credit card payments should not exceed 40 percent of your gross monthly income.
Our Silver Lake Realtors will tell you that in the above example, the couple with $80k income could not have total monthly debt payments exceeding $2,667. If, say, they paid $500 per month in other debt (e.g. car payments, credit cards, or student loans), their monthly mortgage payment would be capped at $2,167.
Our Silver Lake Real Estate Agents say this rule means that if you have a big car payment or a lot of credit card debt, you won’t be able to afford as much in mortgage payments. Most of the time, banks won’t approve a mortgage until you reduce or eliminate some or all other debt.
How To Properly Calculate An Affordable Mortgage
Now that you have an idea of how much of a monthly mortgage payment you can afford, you’ll probably want to know how much house you can actually buy. Although you cannot determine an exact budget until you know what interest rate you will pay, you can estimate your budget.
Assuming an average six percent interest rate on a 30-year fixed-rate mortgage, our Silver Lake Los Angeles Real Estate Agents say your mortgage payments will be on average about $650 for every $100,000 borrowed.
Include Your Down Payment
In a perfect world, you have a down payment of at least 10 percent, and up to 20 percent, of your future home’s purchase price. Add that amount to your maximum mortgage amount, and you have a pretty good idea of the most you can spend on a home.
Our Silver Lake Real Estate Agents say if you put less than 20 percent down, your mortgage lender will required you to pay private mortgage insurance (PMI), which will increase your non-mortgage housing expenses and decrease how much house you can afford.