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How much House When Buying in Columbus and Central Ohio?

House hunting begins at home with planning. The first step toward buying a house is to sit down, before you grab the road maps and hit the streets, you need to do a little planning. We call it "pre-qualifying". Simply its determining how much house you can afford to buy. Knowing your affordable price range will bring your house hunting into focus. Many lenders, without any charge will send out all verifications, and pre-approve you for a mortgage, allowing you to negotiate as a cash buyer.

How much house you can afford depends on two things. How much you can afford for the monthly housing payment, and how much you can invest in the down payment. Monthly payments include principal and interest on the mortgage loan, and property taxes and insurance against fire and other hazards. These four costs are often abbreviated "P.I.T.I." (For some buyers and lenders, monthly housing costs may also include home owners association dues, condominium fees and mortgage insurance.)

Qualifying

In today's market an "affordable home" is not so much determined by sales price as it is by financing, which translates that price into a monthly payment. A house hunter's first step is to set a housing budget, then go shopping for the house (price) and payments (P.I.T.I.) that fit that budget.

Though there are many ways to qualify to buy a home, make sure the monthly payment makes sense to you. A current rule of thumb is that the monthly payment should not be more than 30-42% of the gross monthly income. Restrictions will apply for smaller down payments. 

How Much House Can I Afford?

The key items are the size of the down payment, interest rate, APR and the amount of the mortgage. The down payment might be 0 in case of VA backed mortgages. Or a buyer may invest 20 to 25  percent of the purchase with a conventional loan and not be required to buy mortgage insurance. Your Clifford-Realtors sales associate can be very helpful in determining just how much house you can afford.

Sources For Your Down Payment

The obvious source for your down payment is either your savings or the proceeds from the sale of a home you already own. There are other not so obvious sources. In recent years, for example "parent power" has taken some new twists for the first time buyer.

Home Equity Loans  Parents often have considerable equity built up in their own homes-and many are tapping that asset through home equity loans to make a gift to their youngsters. Ask your tax advisor for current information. Other lenders will require a "gift letter" to verify that parents don't expect repayment.

Shared Equity/Profit-Sharing  In return for providing a part of the down payment, the parents (or another investor) share in the "profit" or net equity of the house when the owners eventually sell it.

Life Insurance  If you have built up a cash value on your life insurance policy over the years, you may be able to borrow from you insurance company up to the amount of this accumulated cash value. Often they will even ask a more favorable interest rate than would be asked for other types of loans.

Stocks and Bonds  If you feel the market doesn't favor selling your stocks or bonds now, you may be able to secure a bank loan using the portfolio as security.

Company Profit Sharing or Savings Plan  Look into the possibility of withdrawing what you have in your profit sharing or savings plan account or borrowing against it, if your company has these programs.

Mortgage Insurance Can Reduce Down Payment

If you need a conventional loan, there is a way to put down only 3 to 5 percent. Through the lender you will be required to buy private mortgage insurance (PMI). This insurance provides protection for the lender in case of default, and allows the lender to approve a larger mortgage amount.

In a common approach you'd pay a monthly rate that would depend on the amount of down payment that is less that 20 percent. Based on today's law the amount of monthly premium would become less as your percentage of ownership increases, and the PMI would drop off when you have a value of 20 percent invested in the home. It is also possible to request from the lender that PMI be dropped before you reach the 20 percent level. This decision is up to the lender on a case by case basis. Ask your lender for specific figures for any loan program you are considering, as the amount of mortgage insurance varies by the type of loan.

One Caution

The larger the down payment, the less money you need to borrow, which means a lower monthly payment. Remember in addition to your down payment and monthly payments, you will need money to pay for closing costs, moving, appliances, household setup, a reserve for family emergencies and other miscellaneous items. So don't plan to put your last penny down at the closing table.

Figuring Your Housing Budget

Generally lenders figure that the home buyer shouldn't pay more than 28-30 percent of gross income for P.I.T.I. payments or 40-42 percent for both. P.I.T.I. and monthly debts combined. This might be a little more or a little less depending on other longstanding long term debts, (more than 10 months), alimony/child support payments, number of children and their ages, and other household budget items.

The easiest way to make a quick estimate of the mortgage amount you may qualify for requires applying the two basic formulas for loan application that lenders use. Keep in mind the loan balance will very over the term of the loan, although the monthly principal and interest payment remains the same.

Two Lender Formulas

Most lenders will require that loan applicants meet both guidelines before approving a mortgage loan. The first formula compares income to housing costs without including long term debts, the second includes all debts. A variety of other formulas exist, VA and some lenders use a single ratio based on mortgage payment and all debts, which allows easier qualifying for a more expensive home for a borrower with little debt.

To figure your housing budget simply multiply your gross monthly income (before taxes) by 30% and 40%. (For self employed buyers you must use your adjusted gross income as stated on your federal income tax). For example a family with a monthly income of $3500 might qualify for a mortgage with payments up to $1050. For specific figures ask your Clifford-Realtors associate.

More Mortgage Help

New types of mortgages such as graduated payment mortgages, flexible payment mortgages and deferred interest loans, feature monthly payments that start lower than usual in the early years and thus help home buyers "afford" more house and buy sooner by qualifying on a lower mortgage payment. (See Financing Chapter.)

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