As I live, breathe, and work everyday here in beautiful Lancaster County, PA the question of home affordability comes up frequently. Fortunately, finding the answer is quite simple: its just a matter of your numbers.
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1. The First Number: Your Income
How much did you report on your tax return last year is a good place to start. Another way to calculate it: are you paid a regular (like a salary) paycheck? You can use that amount to come up with your current annual income. For example, if you are paid every other Friday: take the amount you are paid and multiply it by 26 times a year.
Amount you’re paid on your biweekly paycheck X 26 = Annual income
Amount you’re paid every month x 12 months = Annual income
2. The Second Number: Down Payment
How much money do you have available for a down payment. Something to good to note here: depending your your loan program you choose, you can receive a gift from a family member to help for this. If you are a first time homeowner, you probably don’t have much saved up.
Amount saved for down payment + amount gifted = Down payment funds available
3. The Third Number: Your Debt
As in, if you add up all your debts you pay monthly, how much is the total obligation? The common debts would be credit cards, student loans, and car payments. Other lesser common things would be alimony, child support, or other regular payments made. Your current rent, utilities, cable bill, etc don’t count in the official ‘Debt to Income Ratio’ number since once you’ve finalized your purchase, you won’t be renting anymore because you’ll be moving into you sweet new place!
Student loan monthly + credit cards total monthly + car payment monthly + whatever else you have monthly = Total Debt (Monthly)
4. The Fourth Number: Credit Score/Credit History
Most everyone these days are familiar with what a credit score is, so I probably don’t need to explain much about that. When I’m talking to a potential buyer, I’ve found that most have a good idea whether their credit score is on the good side of things or the bad side of things. Your credit score/credit history is the number that summarizes your track record of how you handle paying your debts/obligations. If you don’t make your payments in full and timely, guess what: other entities want to know and will use that information to decide if they will loan you money…or not!
Keep in mind, this is article is written as a general guide.
What I’ve written above (quite accurately of course), is intended only as a general guide. Everyone’s home shopping situation is unique and I strongly advise contacting us today to have a customized strategy tailored to your specific needs and goals. There are subtleties to some situations and those details can matter a great deal. Do yourself a favor and the leave the work of professionals…in the hands of the professionals!
Question: Where can I find more information about calculating my affordability?
Answer: There is a great home affordability tool created at Realtor.com (works efficiently and there are no advertisements bogging it down) that will help you quickly calculate your affordability AND you can even put in your zip code…which makes it factor in local property tax averages. I suggest you check it out! I use it myself quite often: http://www.realtor.com/mortgage/tools/affordability-calculator/