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How much house can you afford?

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That question bugs me for some reason. It's kind of deceitful. It looks like it's designed to psyche people out and get them to accept that they don't deserve a nice house and can only afford a small fixer.

It takes the focus off the cost of the home and the loan, like a car salesman asking what kind of monthly payment you're looking for, ignoring the rate and number of months and how much you're borrowing.

The answer to that question depends on whether the house is overpriced and what interest rate you are approved for. I imagine people could afford a lot of house for a low price and low rate.

Why does every real estate and mortgage person ask that derisive question?

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Why does every real estate and mortgage person ask that derisive question?
Not a realtor and not a mortgage broker, but I guess it is a good starting point. The majority of people seem to underestimate the monthly cost of a home and overestimate their earnings. So they need to start somewhere so that people are shopping in a realistic neighborhood. :) None of the parties involved want to waste their time- time is money.

Any realtor/mortgage broker I have dealt with has based their "how much house can you afford" starting point on credit scores/current rates/current income/down payment. If they are not, then they probably need to. The amount of house you can buy depends on all these factors.

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After going over income, monthly payments, credit, assets/reserves, and down payment... I usually start out with "What size home would accommodate your needs?", then I jump on realtor.com with the client over the phone, punch in their zip code or area, and start looking at homes that fit their requirements, figure out what a home that they would need goes for, and then start doing payment calculations based on that information.

It all comes down to how much one can afford though. If the payments are not in the affordability range for the client, then we discuss alternatives, such as paying points to buy down the interest rate, putting more money down, selecting a different loan program, looking in less expensive areas, or looking for lesser accommodations.

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When my husband and I were looking, we also thought about the expenses that would come after we bought the house. Just regular maintenance is something to think about also.

Also the "unexpected"

Our dishwasher went out last week. That's an unexpected expense.

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The most conservative figure I have heard is from Dave Ramsey. He says that 25% of your income should be the max to go towards your home costs, or PITI (Principal, Interest, Taxes, Insurance)

The loan programs guidelines depend on the program, and they are a range from 36 to 43%.

I have a different system.

Take your rent payments and add 50% to them. Make that payment for a few months, ie pay your rent and put the other 50% in a savings account that you never touch. If you are comfortable with that figure, add more. You will find out how much you can "afford". There are some people that eat out a lot, others that don't. Some have hobbies, others don't. On and on. This money will make a nice start towards your down payment/moving costs/replacing those ugly drapes etc.

Then put the amount you spend towards Xmas presents in another savings account. That will be the start of your reserve account.

Very complicated system, but I think that if more people went with that system instead of what loan officers say you can afford, things would be better for all.

Charles

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A very good answer Firstsource. If me and DW listened to what others told us we could afford, things would not be pleasent right now. Instead we are considering buying a second home and renting the first one out to our daughter and her friends.

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You really have to know your finances and prepare for the unexpected - like homeowners insurance going up, taxes etc. What they say you can afford is a lot different than what you can actually afford when you calculate cars, kids, food etc in. It is best to know what you can afford rather than someone tell you what you can afford.

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Hi Rick,

My 2@ worth on your project.

Have a firm rental agreement with your daughter (and friends if you want to help them also) and have your daughter pay you rent by check every month. Make sure that you cash the check that she gives you on the first, on the first. To go one step further, have a third party collect the checks (there probably is a wise realtor company that will help in this, or maybe a bank) again not necessary for the 3rd party, but nice touch.

Then, years from now, when she wants to purchase a home of her own, she will have copies of rent checks showing that she paid on time. There are some programs that she could get at this time that would not make this necessary, but as loan programs change from time to time (and a lot lately) It could be that this is a big plus for her to have

Charles

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And FirstSource is your guy.... The most honest upfront person I have ever met. He helps you get the best deal and not what will pad his wallet. This is coming from someone who is working with him now.

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When my husband and I were looking, we also thought about the expenses that would come after we bought the house. Just regular maintenance is something to think about also.

Also the "unexpected"

Our dishwasher went out last week. That's an unexpected expense.

Everybody needs a night out once in a while, I know I sure did!!:mrgreen:

Sorry, couldn't help myself!:twisted:

Goldbug:)++

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