The American dream of home ownership took a hit during the recent housing crisis. Now that the bubble has burst, and the housing market has regained much of its previous shape and form, many Americans are once again attracted to what has always been the intrinsic benefit of home ownership. That is, having a place to call their own. Determining how much home you can afford, however, continues to be the question that most often causes potential home buyers to fret. Here are some things to consider before buying a home in Ann Arbor:
Old Ratios still Apply
The first things you’ll want to take a look at involves a couple of easy calculations. The housing ratio rule says you’ll be qualified to take on a mortgage for a new home if your monthly house payment, including taxes and insurance, does not exceed 28 percent of your pre-tax monthly earnings. Income often does not tell the full story, however. You’ll also want to take your ongoing debt into account. Car loans, student loans, credit card bills and the like can affect your ability to make regular and timely payments on your new mortgage. The rule here is that your debt to loan ratio should not exceed 36 percent of gross monthly income.
Bigger Down Payments Help Ease Mortgage Rates
While you can sometimes qualify with less, a good down payment should be roughly 20 percent of your total loan. Hitting this mark will allow you, in most cases, to avoid having to purchase private mortgage insurance. Besides, lenders love cash up front. If your credit score is below 680, home loans can get very pricey in a hurry. Higher risk for the lender equals higher cost for you. Even if you qualify for a so called “conventional” mortgage, most lenders will charge a “less than perfect” credit borrower more to insure the loan against default.
Think about Tomorrow
Even after having worked your way through the aforementioned calculations, it’s probably time for a little soul searching. Even if a lender qualifies you for a nice mortgage, it’s important to think about your own comfort zone. The old term “house rich but money poor” applies to those who have stretched themselves so far financially to get the house of their dreams that they have significantly hampered their ability to live the lifestyle of their dreams. Only you know how much you can afford to spend on a home. Also don’t forget to do a little future prognosticating. If you plan on getting married, having children, putting existing children through college or even just buying a new car, the last thing you’ll want to be is money poor.
Get Good Help
Depending on where you are in the process, there are any number of good sources of information. A real estate professional with knowledge and experience navigating the vagaries of the market area your exploring can be invaluable, as can a good mortgage loan officer. Don’t be afraid to ask for help. Purchasing a home is, for most, the largest and most significant investment decision they’ll ever make.