Helping your clients determine how much home they can really afford can be tricky. These days, the financial factors include much more than the loan amount a consumer pre-qualifies for. Carla Hill gives advice on six things your clients should consider before buying a home:
1. Monthly Payment: Conventional wisdom tells us that your mortgage payment should be no more than 28% of your gross monthly income. This means that if you make $50,000 a year, the maximum amount you would safely want to pay each month is $1,166. How do you figure this for you own salary? Take ___ (salary) x .28 = total dollar amount for year. Then divide the total dollar amount by 12 (months in the year) and there you have it!
The National Association of Realtors also gives this simple equation for renters to use to figure out how much they can afford. Multiply your rent by 1.32 and that will equal your affordable mortgage payment.
2. Job Security: Have you recently changed jobs? Is your company experiencing layoffs? In times of economic uncertainty, you may find it best to stay put. This is why many economic analysts keep saying that a housing recovery is dependant on a jobs recovery. When jobs return, so will the buyers.
3. Savings: The state of American savings is scary. According to Visual Economics.com, the average family has $117,951 worth of debt and only $3,800 in savings. Even worse, a quarter of Americans have no savings at all – and half have nothing saved for retirement.
How does your debt-to-income ratio stack up? The Federal Reserve thinks debt adding up to more than 40% of your gross income could indicate financial distress.
4. Emergency Fund: Before you even begin to think about buying a house or moving, you must have an 8-month emergency fund in the bank. This means you need to add up your living expenses for a month. Include all the necessities and things that must be paid (rent or mortgage, car payments, insurance, food, gas money, electric, phone, tuition, day care, etc). Then multiply this number by 8. You must have this in case you or your spouse loses your job, gets sicks, or some other disaster hits your family.
5. Downpayment: This is savings in addition to your 8-month emergency fund. And a downpayment should be at least 20 percent of your purchase amount.
Look at it this way. If your monthly expenses are $2,000 a month and you want to buy a $200,000 house, you’ll need a bare minimum of $36,000 in the bank to truly afford this move. That doesn’t include cash needed for closing costs, repairs, moving expenses, and renovation.
6. Lifestyle and Extraneous Factors: Everyone has different wants and needs. You may be fine spending a little more for the house of your dreams in exchange for taking fewer vacations. Others abhor the statement, “house rich, cash poor,” and instead would rather have funds for shopping, dining out, and travel. And don’t forget about extraneous factors, such as aging parents, car repairs and maintenance, things may come out of nowhere!