Among the most common questions from a home buyer is “How much home can I afford?” The answer, however, like many things, is that “it depends”.
There are no concrete rules for how much home you can afford, or how big your mortgage should be. This is because the way that a mortgage lender calculates your maximum purchase price will be different from how you would calculate it yourself.
Using DTI To Determine Maximum Purchase Price
When a mortgage lender calculates a home buyer’s maximum home purchase price, it doesn’t actually consider the purchase price of the home.
Rather, it looks at the buyer’s expected mortgage loan size and the current mortgage rates to determine the expected monthly mortgage payment, and then compares that figure to the buyer’s monthly income.
This comparison is known as the Debt-to-Income Ratio. Sometimes called DTI, the ratio has two components.
Debt-to-Income : Front-End Ratio
The first component of the debt-to-income ratio is the “front-end ratio”. Front-end ratio compares the expected monthly housing payment to a buyer’s monthly income, where “housing payment” includes all of the following obligations :
Monthly principal + interest payments
Monthly real estate taxes due
Monthly homeowners insurance due
Monthly dues due to an association
There is no maximum limit for a front-end ratio, but lenders prefer to see front-end DTI of 28% or less. In other words, no more than 28% of a buyer’s monthly income should be allocated to housing payments.
Debt-to-Income : Back-End Ratio
The second component of debt-to-income ratio is the “back-end ratio”. Back-end ratio compares not just the monthly housing payments against a buyer’s monthly income, but all monthly payments.
Back-end ratio accounts for all of the following monthly obligations a home buyer may have :
Monthly housing payment(s)
Monthly minimum credit card payments
Monthly child support or alimony
Monthly car payments for a car loan or lease
Monthly payments to an installment loan such as a timeshare
In general, banks want to see a back-end ratio of 36% or less, however, having a DTI over 36% will not automatically disqualify your mortgage application. Many lenders allow up to 45% debt-to-income.
Make A Monthly Household Budget
Using DTI as an example, when 45% of your gross monthly income is spent right off the top, it doesn’t leave much money for saving, investing or living, let alone paying taxes.
Therefore, another approach to the “How much home can I afford” question is to determine the maximum monthly payment you’d like to make towards housing, and then working that figure backwards to find a maximum mortgage loan size.
For example, if you budget for a monthly housing payment of $2,500, and the current 30-year fixed rate mortgage rate is 4%, assuming real estate taxes and homeowners insurance cost 2 percent annually as compared to the value of the home, you work the math backwards to find that your maximum purchase price for a payment of $2,500 is $385,000.
By setting your monthly maximum payment, you can make sure to stay in budget. If you leave it to the bank, you may stretch yourself too thing.
We examine the impact of mortgage rates and house prices on the number of renters qualified to buy to show that lower mortgage rates, rising incomes and changes in house prices have affected the number of renters who could qualify to purchase a median-priced home over time.
We look at the impact of mortgage rates ceteris paribus, a latin term used in economics that means “holding everything else constant.” In this case, we’re going to use the same income distribution, home price, and down payment requirement, but we’re going to change the mortgage rates to see what happens to the number of renter households who qualify to purchase the median priced home.
The table below shows the results of our thought experiment. While 20 million renter households qualify based on income to purchase the median-priced home in 2012 at prevailing mortgage rates, that figure would decline if interest rates were to rise.
If rates were to return to 5 percent, only 17.6 million renter households would have income sufficient to qualify to purchase the median-priced existing home. A rate increase to 7 percent causes increased monthly payments of $280 per month, and an additional $13,400 is needed to qualify to purchase this home. That type of rate increase would knock nearly 6 million currently qualified renter-households out of the market
What is the likelihood of increasing mortgage rates? In our current forecast, NAR Research expects mortgage rates to begin to creep up but still remain below 5 percent through the 2014 forecast horizon. Mortgage rates bottomed in November/December 2012 at 3.4 percent for 30-year fixed-rate mortgages. Over the most recent 15 years, rates have ranged from 3.4 to 8.5 percent and averaged 6 percent as seen in the chart below.
One note about the above calculations. They assume that potential buyers meet credit qualifications and have sufficient cash on hand to close a transaction. Lending standards, credit quality, and access to funds will affect the number of households who will ultimately be able to buy a home.
Looking to purchase your first home? I’m here to help!To get started on this exciting journey, I would be happy to provide you with a complimentary copy of Your First Home: The Proven Path to Home Ownership. Packed with inspiring stories and the wisdom of thousands of successful first-time home buyers, it’s a must-read for anyone aspiring to buy a home. This book is a must and will help you through your home buying process. Whether you looking to purchase a home in Madison or Rankin counties, I can show you any home listed in the Jackson Multiple Listing Service.
Finding any type of home whether it be new, lots, a second home, foreclosure, or investment property in Madison or Rankin Counties can sometimes be a challenge. You can find it here on my website. Get immediate information on ALL new listings that match your criteria emailed. Create a Free Account. Get a home search login to view the most up-to-date home listings in your area. Registration is free and we never sell your information.
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Madison MS Real Estate Market Statistics for April 2013
The median list price in April for single family homes in Madison is $309,000. The list prices increased by 14.44% from the previous month.
The median sale price in January for single family homes is $214,207. The sale prices dropped by -4.3% from the previous month.
Median Listing Price
Median Days on Market
Contact Stephanie Hall for more information on homes listed in your area.
1. GET PRE-QUAILIFIED: Before even looking at a home you should get pre-approved for a loan. No bank will look at your offer without it. Meet with a local and trusted mortgage broker, they can prequailify you at no cost, they will look at your credit plus your financials and let you know if there are any mortgages that you may quailify for. You should then tell them you are looking at bank owned homes so they can provide you with a list of what condition the property needs to be in for you to be able to get a mortgage.
2. WHO IS REPRESENTING YOU? : You should know that the listing agent represents the seller. You may want to hire a buyer broker who is experienced in bank owned home sales. An inexpereinced agent can hurt more than help. You can usually hire a buyer broker at no cost to you, they get paid their commission from the fee advertsised in MLS by the listing agent and paid at closing. This way they can get the information for you and you will have someone assisting you through each step of the buying process.
3. MAKING AN OFFER THE HOUSE: Before making your offer you should know that most houses are sold “AS IS”. The banks will not re-negotiate after a home inspection or make any repairs. Your best chance to get the bank to make repairs or credit you for repairs is in your initial offer. You shoud inspect the property before you put in the offer. If you dont want to spend the money for some reason, then when looking at the home you are going to need to look at the well, septic, roof, siding, windows, heating system, look under the sinks, in the basement for signs of water or mold, stains on the ceilings and anything that sticks out or if you are getting an fha loan, any safety issues.
4. THE OFFER: In your offer you should make sure you attach your pre-quailification letter, you should make sure you put a closing date of 30 days or less, make sure your deposit is at least 1% of the sales price and it is a cashiers check. Try and avoid any contingincies other than an inspection and mortgage contingincy. Do not put any expiration dates in for the bank answering the offer.
5. KNOW THE TIME LINES: You should know that each bank works differently than any other. The Listing agent has a great deal responsibility to assist the asset manager and move teh offer through the process of approval or counter offer. You can easily ask the listing agent what the average is for the bank. Banks can average 1-3 days to answer an offer. Most of my banks offer within 1 day and alot of times it is the same day. Allow 3-7 days from acceptance to get you the signed purchase and sales. The one thing you can do to speed up your own closing is to make sure the foreclsoure deed is complete and recorded, otherwise this could hold up your closing.
A short sale is a fairly simple procedure, at least in theory. A homeowner sells their home for a price below the current mortgage balance. The bank agrees to take this lesser amount as payment in full of the mortgage in order to avoid the heavy cost of a foreclosure. Here are some tips for buying your first short sale.
Short Sale prices are determined by the Market
Banks determine which offers to accept by reviewing the current market conditions. They will look at the prices of homes that have recently sold in the nearby area. This information will provide the lender with solid data for the average price of a home in that vicinity. How low will they go? This depends on how quickly they would like to sell the home. If they determine that they would prefer to sell the home now, and not proceed to foreclosure, they may agree to sell the home at below market value.
Ask your Realtor® for their Price Opinion
Before you submit a low-ball offer to the seller, ask your Realtor® for their price opinion. This is a good way for a prospective buyer to find an appropriate price range for an offer. Your agent can look at recently sold comparable homes and give an opinion on what they feel the home should sell for. This is similar to a Comparative Market Analysis, or CMA.
Multiple Mortgages Can Cause Problems
When a home has a 1st mortgage and 2nd mortgage that are held by separate lenders then a short sale could take a very long time, if it gets approved at all. Unfortunately, this type of scenario is out of the hands of the real estate agent and the seller. Whether or not the two lenders agree to the short sale offer is totally up to them.
Approved Prices are Usually Processed Faster
If a lender has already determined a price that they will accept, this can speed up the process. Usually, this is an indication that the seller has been in contact with the bank to discuss the possibility of selling the home. If an offer within that price range is submitted to the bank, the short sale is far more likely to be approved quickly.
Prepare for the Bank to say No
While short sales can help buyers get a home at a discounted price, the process can stretch out over time. The sale can get turned down by the bank for a number of reasons. This is why people looking to buy a short sale should be prepared to move on to a different property in the event that the bank denies the short sale. Keep an eye open at available homes during the short sale process. If the bank does say no, you will then have a list of potential houses that may also be an option.
While a short sale transaction may span a few months, it is a good way to buy a home at a friendly price. Talking to an experienced Realtor® about the available short sales in your area could put you in line to get a good home at a great price. Call Stephanie for assistance today.
Benefits of using a buyers agent when purchasing your Madison MS home..
Here are 3 useful reasons to use a buyers agent.
1. Buyers agents represent you. Buyers agents get paid from the seller of which ever home you choose. They are ONLY working for you and will get paid from the seller. There is no hidden agenda when it comes to buyers agents. They work with your interest in mind.
2. Buyers agents can literally save you thousands of dollars. Many buyers may think that working with the listing agent may actually save them money but more often than not, the opposite is true. A listing agent is working for the seller and they want to get as much for the home as possible. A buyers agent is working for you, the buyer. They want you to get the best deal and will negotiate on your behalf, not for the interest of the seller.
3. Buyers agents can help you hold all the cards in a negotiation. This is extremely helpful when negotiating on a price. The buyers agent may know you can afford more than you offer and how much you love the home but won’t disclose this to the listing agent or seller. This keeps the listing agent and seller in the dark about your intentions and makes them all the more willing to accept lower offers. If the listing agent knew you loved the home and that you could afford more than you are offering, they may not agree to a lower offer and raise the counter offer higher than you really hope to go.
These are just a few simple reasons to use a buyers agent when purchasing Madison MS Real Estate . Call Stephanie Hall to help you find your next home!
You’ve decided on your home. All paper work is in order. Now it’s time to do the final walk through. It’s important to remember that final walk-throughs are not a home inspections. It’s not a time to begin negotiations with the seller to do repairs, nor is it a contingency. A final walk-through is an inspection
performed anywhere from a few hours to five days before closing, and its primary purpose is to make certain that the property is in the condition you agreed to buy – that agreed-upon repairs, if any, were made and nothing has gone wrong with the home since you last looked at it.
Buyers are often pressed for time as the day draws near for closing, which means buyers can be tempted to pass on the final walk-through.
It is never a good idea to fore go the final walk-through.
Here is a list of items to check on a final walk-through:
Turn on and off every light fixture
Run water & look under sinks for leaks
Test all appliances
Check garage door openers
Open and close all doors
Inspect ceilings, wall and floors
Run garbage disposal and exhaust fans
Test heating and air conditioning
Open and close windows
Make sure all debris is removed from the home
Sometimes sellers don’t move out until the day the transaction closes or even a few days after closing. In those situations, the buyers should do a final walk-through in the presence of the seller. Why? Because the seller knows all the little quirks about the home and can answer questions the buyers may have.