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How to Calculate the Type of Home You Can Afford

Searching for your dream house is a lot of fun. When you have de-listed your choices and lay down all the data needed, as to how much is the cost of each house, the status of the house - its location, the amenities and facilities, the repairs to be done if there is any, the improvement or renovation - to mention some, at this point becomes the hard time to calculate how much is the total cost versus your financial capacity.

In calculating the type of the house you are capable of paying, there are available tools in the market which can be used. These tools range from the practical to the sophisticated technology. There are those companies which offer simple to complicated means of calculation.

You can start it out by using a simple method. First you should be aware of your financial standing by writing down your income and other sources, expenses which can be classified further into needs and wants, credit, monthly and annual budget, savings, assets, properties and the like. Do not ever exclude any data no matter how small or big they can be. It is important to have a total or complete picture of your finances to determine if you can qualify or afford to buy the dream house of your choice. Make a simple financial statement that can give you a total look of your monthly and annual income and other sources as against your monthly and annual expenses. Factor in the loan payment of your choice houses which can also be done both monthly and yearly. Total each of your income and expenses that include the home loan payment. Count in also the down payment you can afford, if there is, from your savings. This will give you at least a bird's eye view whether or not you can afford the houses in your list. If not, settle for the less which your finances can allow you.

 

You can now use the tools being offered by business enterprises whose specialization or expertise is on the calculation of your affordability of purchasing a house. You can visit their websites and they have a ready calculator in which you only have to fill in the required data. This can be quickly done and the results are instantly given. You can also play with it by giving the different costs of the houses in your list. This process gives you the idea which house can be bought through your available resources.

You may also use what is known as the lenders' tools of calculation. Two of these are referred to as "front-end ratio" and "back-end ratio." The former is about the percentage of your annual gross income that is allocated in paying the monthly home loan. Mortgage payment is composed of four aspects which are the principal, interest, taxes and insurance, also known as PITI. The PITI should not be over 28% of your gross income. But then there are lenders who qualify borrowers who go beyond 30% - 40%. The latter is otherwise identified as "debt-to-income ratio" or DTI. This tool determines the percentage of your gross income that is needed to pay your creditors. The debts covered under this are your mortgage, credit card payments, child support and other expenses falling within the category of loan payments. Almost all of the lenders are allowing their clients to have a DTI that is not over 36% of your gross income. To determine your optimum monthly debt based on the ratio required, you have to multiply your gross income by 0.36 and divide it by 12. To make it more simple, say you have earnings of around $200,000 annually and your monthly debt allocation should not exceed $6,000 which means that you can afford to pay the the house of your choice.

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