Calculate How Much Home Loan You Can Afford to Borrow

It is extremely important to calculate how much home loan you can afford to borrow in order to ensure smooth and timely payments as well as financial stability in the future. In order to do so you need to determine the following factors:

  • Determine home ownership costs.
  • Understanding tax benefits of homeownership.
  • Accumulating and investing the down payment.

We will talk about, and explain each of these on the following few posts.

Lenders Cannot Tell You What You Can Afford

Many consumers who are looking to borrow a home loan get confused into thinking that what the home loan lender qualifies them for is the amount that they can actually afford to borrow and pay back. A lender cannot tell you what you can afford.

When a mortgage lender tells you that he can qualify you for a loan of $500,000, this does not necessarily mean that you can afford to spend that much on the home. What the lender is effectively trying to say is that based on what information he has seen regarding your finances, and the little or nothing that he knows about your other financial goals and plans, this is the amount that he thinks will be a prudent risk to lend to you.

In a nutshell, a lender does not know or even care about your other financial goals and interests. A lender does not know not really care whether you are falling behind in your other financial goals such as saving for retirement, saving for starting your own business one day, saving for a child’s marriage, college education or even paying for adequate personal insurance cover.

This is the main problem is taking for granted that the amount that a lender is willing to lend to you is the same that you can actually afford to borrow. People in all income levels, get into trouble by overextending themselves when they borrow more home loan than they can afford to pay back. Even people in the high income bracket can feel the financial strain and have to continue to working long hours and make other sacrifices such as spending limited time with family and children in order to meet the housing payments. When the personal finances of a person get stretched like this, it is fairly simple for a straw to break the camels back. Any kind of a incident that puts additional strain on the finances could result in the person losing their homes as well as their good credit standing.

At all points of time remember that just because a home loan lender or a real estate agent says that you are eligible and can qualify for a certain amount of loan, does not mean that you financially afford to borrow that much money and pay it back comfortably. Always figure in your other expenses, financial goals and obligations before calculating how much loan you can comfortably afford to borrow. Lenders do not tell you what you can afford to borrow they mostly only tell you the maximum that they will allow you to borrow. There is a lot of difference between the 2.

Warnings Signs Of Looming Credit Problems

Are You Headed for Credit Trouble? Answer Some Questions and Find Out

Getting a high interest rate loan to consolidate credit card debt is not necessarily the end to your fiscal woes. If you’re doing it because you want to reduce your monthly payment and stretch of the length of time, you could end up in a worse the situation. Not only are you converting unsecured credit card debt into a debt secured by your house, but you are paying more on interest over the long run in spite of the lower monthly payments.

The 1st thing to analyze here is whether you have irresponsible credit habits. If you do then you could be in serious credit trouble which is something you should think about and tried to get help for before you consolidate your debt. The following are some signs of unhealthy credit behavior:

  • Making only the minimum only payment on your credit card.
  • Using credit to supplement your income and living beyond your means.
  • Charging more on your credit card than making payments.
  • Using credit card to make purchases for household expenses such as groceries, gas and even insurance that you used to pay with cash.
  • Have a credit balance that does not decrease.
  • Charging close to the limit on your credit card.
  • Finding the need to apply for new credit cards to supplement your spending.
  • Needing debt consolidation loan to pay off credit cards.
  • Not knowing how much you owe on all your debts combined.
  • Feeling stressed about your credit card bills.
  • Having to tap into your savings for credit card spending.
  • Running late on the payments.

 

Getting into a serious debt problems usually does not happen overnight.

It is a gradual process that happens due to irresponsible credit behavior, mostly. Most of the times people ignore the signs of credit trouble till it’s too late.

Answer some of the following questions to decide if you are headed for serious credit problems:

  • Are your debts making your home life unhappy?
  • Does the stress of your debts distract you from work and sleep and spending present time with your family and friends?
  • Are your debts in any way affecting your reputation?
  • Do your debts cause you to think less of yourself?
  • Have you ever given false information in order to obtain credit?
  • Have you ever made unrealistic promises to creditors?
  • Do you ever fear that your employer or your panties and discover the extent of your debt?
  • Do you always count on borrowing money to deal with a difficult financial situation?
  • Has the pressure of the debt caused you to consider getting drunk?
  • Have you ever borrow money without considering the rate of interest?
  • Do you expect a negative response subject to the credit investigation from a lender?
  • Have you ever developed a strict regime for paying your debts only to forget it soon after?

If any of these changes signs belong to you then you could be in for serious credit trouble. You could be soon facing financial challenges in getting out of debt. If you cannot sort out the situation by yourself, it is time you look for help elsewhere. Get counseling or use the services of a nonprofit credit counseling service to help budget your expenses. These services can also enroll you for debt management plan that will help you get out of debt. Usually they can clear you of your debt within the next 3 to 5 years by negotiating with lenders.

Balancing Retirement Plans With A Mortgage Loan

Establishing Financial Goals for Retirement

Planning to save for retirement is a common goal and many people work towards this end. The good news is that you can also take advantage of the tax incentives when you saved in a retirement fund. The money can be attributed to one employer-based retirement plan such as a 401K or to a self-employed plan for example the SEP–IRA or Keough, which is tax-deductible at both the federal and state levels. The interest that you earn on a retirement account is taxation free.

One should typically not makes saving money for retirement and saving money for a down payment on a home. If you deposit money that you are saving for a down payment on a mortgage into a retirement home you could put yourself in a bit of a financial complication. When you withdraw money from her retirement account you not only will owe current income taxes but they also face hefty penalties which could be as much as 10% of the amount withdrawn for the IRS plus whatever penalty your state charges.

Trying to do both, save for a mortgage down payment and for your retirement puts many people in a complicated situation. You can save outside a retirement account and have access to this account for making the down payment but then you will accrue more taxes. But putting this money in a retirement account gets you are compounding rate of interest and tax benefits but denies you access when he needed two make the home purchase. There are a few ways in which you can handle the situation to accomplish both agendas. Borrowing against employees retirement plan some employees retirement plans specially in the larger companies allow the borrower to borrow against their retirement savings plan balances. Some companies even offer first-time homebuyers of the financial assistance so make sure you find out if such a plan is available with the company that you work for.

Implement a first-time homebuyers IRA withdrawal

If you have an individual redundant account you are allowed to withdraw up to $10,000 towards a home purchase as long as you haven’t owned a home for the past two years. This is a lifetime maximum amount beyond which you cannot withdraw. Withdrawing from a Roth IRA account is a good idea because the withdrawal is free from income tax as long as the account is at least five years. Standard IRA account has no such restriction and the withdrawal will be taxed as income so you will only get the amount that is that after the taxes have been withdrawn.

In order to balance these two worlds one has to decide upon the priority. Saving for your retirement may be a very important priority for you but if you are planning to purchase a home than most of his saving me to be outside at tax-sheltered retirement account. Putting the savings for retirement account may take a backseat for deterioration that you need to build up savings for down payment and closing costs for a mortgage payment. Of course if your finances allow you to do both simultaneously then nothing like it.

How To Determine Home Ownership Expenses

Determining Potential Home Ownership Expenses

It is an important step to determine the expenses of home ownership before you take out a mortgage. This will give you a fair idea of how much you can actually afford.

If you’re about to buy your first home then it is likely that you will not be able to get a good grip on the likely expenses that are to be associated with owning a home. Even people who have owned their home and are refinancing to purchase a more expensive property often get his calculation wrong. Here we will talk about all the various expenses that are usually associated with buying a home not just during the time of taking the mortgage but even later. Such expenses may not be apparent and you applied for a mortgage but keep surfacing as the home loan approval process progresses.

Mortgage payments

This will of course be the foremost cost of purchasing a new home. A mortgage loan is taken out, before 15 or 30 year time span. The payment, mortgage is usually made on a monthly basis. During the initial months of the mortgage most of the monthly payment goes towards paying off the interest rate whereas very little goes towards reducing the principal amount that you owe. That portion of interest payment and the principal payment changes gradually as the time of the mortgage progresses with more of the payment going towards the interest. Towards the end of the mortgage loan almost all of the payment is devoted towards paying off the principal amount. When you go to a lender to determine how much you can borrow the mortgage lender takes a look at your current expenses and income and tells you how much mortgage loan you can qualify to borrow. Do not make the mistake of taking the qualification amount to mean the same thing as the amount you can afford. The mortgage lender will also tally up your housing expense the competence of its usually mortgage paYment, Property Taxes and Homeowners Insurance Which Is Usually an Added Expense When the down Payment Is Less Than 20% of the Amount Borrowed.

Understanding Lenders Ratios

The when the lender calculates the amount that you can follow each calculates the housing expenses and now requires that it does not exceed 40% of your gross monthly income which is your income before tax deduction. For example if your gross monthly income is $5000 then the lender may not allow housing expenses to exceed $2000. If you’re self-employed and complete the INS form 1040 schedule C, the mortgage lender uses your after expense net income from the bottom line of the schedule C. The lender also adds back non-cash expenses for items such as depreciation which increases the net income for mortgage qualification purpose.

The housing expense ratio will ignore all other aspects of your financial situation suggested long-term and short-term financial goals, retirement plans and other foreseeable expenses which are only known to you. Even the modeling and property contains costs may not be included in this estimate which can be a substantial additional expenditure for the homeowner. For this reason never assume that the amount that the mortgage lender is qualifying you for is the amount that you can actually afford to borrow your mortgage.

Paying for Property Taxes and Home Owner’s Insurance During Closing Mortgage

Mortgage Interest Paid Is Tax Deductible

Excess Borrowing on Mortgage and Calculating How Much You can Afford To Borrow

Including Closing Costs in Your Home Loan Budget

Common Mortgage Closing Costs and How to Budget For Them

Adding Maintainence Costs To your Home Loan Budget

Considering Other Financial Goals When Making a Budget for A Home Loan


You Need To Start Saving Money Before Applying For A Mortgage Loan

In most circumstances people need to start saving before they can come up with enough money to make the down payment as well as pay for the closing costs of a home mortgage. In order to save you will need to play around with the information that you collected about your own income and expenses. The steps that you decided take will depend upon your personal approach and your personal lifestyle. You will have to make the cuts and say where you think you can have the maximum results.

Here are some ways in which you can cut down your spending in the future:

Pay off consumer debt

Try and use less of credit cards and other forms of credit. Bordering on consumer loans encourages you to live beyond your means and paying interest on these loans means that you are spending a lot of extra then what you initially paid for. The interest rate on revolving credit on a credit card are high and are not tax-deductible. If you can be of these consumer debts from a source of income then you should do it without compromising any emergency fund that you have created for you and your family.

Cut down on nonessential spending

This is probably one of the easiest areas where you can save money. For many people it is also the largest area where there spend money which can be otherwise saved. Spending on eating outside, entertainment and luxuries is what is called nonessential spending. Essential spending is what everybody needs to spend on food shelter and clothing and healthcare what basically compromises the necessity of an individual. Apart from that you will discover that you can cut down on a lot of spending if you exercised more discipline.

Purchasing products and services that offer high-value

Incidental concentrating on purchasing high-priced products all of a sudden brand you should consider buying products that offer more in terms of value. High quality doesn’t have to come at the cost of price at all times. Try cheaper alternatives two simple things like printer ink cartridges, laptop batteries etc.

Buying in bulk

Many times people can save on their monthly shopping if they are a little more organized about it. If there is a certain household item that is used frequently and regularly then you can probably save by buying those items in large sizes or in volumes. Stores such as Walmart, Spencer’s and Costco offer combo packs and competitive pricing along with several combo offers which allow you to maximize your savings on consumer household products.

Impact Of A Mortgage Loan On Your Financial Future

A mortgage loan will impact your financial future as well since it will be a sizable payment that you will need to make regularly. If there are any long term or short term financial plans then they need to be considered in the cost of your mortgage as well. These plans will also affect the amount of mortgage that you can borrow.

When you’re contemplating the purchase of a home it is also a good idea to consider the impact of such a purchase on your financial future. Usually for most of the people the purchase of a home is the single largest purchase that they will make in their lifetime. Also the mortgage payment and the expenses associated with keeping her home are the single largest expense is that they’re going to face. Therefore you must tabulate your costs of keeping a home and see how that’s going to affect your near and distant financial future. Some of the expenses that you can contemplate when calculating the cost of your home and its impact on your finances are as follows:

Taxes: Social Security federal and state and local. Housing expenses: rent, mortgage, property taxes, gas/electricity/oil, homeowners insurance, water, phone, cable TV, furniture/appliances, maintenance/repairs. Food and eating: supermarket, restaurants and take out. Transportation: gasoline, maintenance/repairs, tolls and parking, bus/subway fares. Appearance: clothing, shoes, jewelry/accessories/watches/earrings, dry cleaning, haircut, makeup, others. Debt repayment: credit card bills, auto loans, student loans, personal loans, other loans. Entertainment: movies, concerts, vacations, travels, gives, hobbies, pets, health club, others. Advisors and professionals: accountants, attorney, doctors. Healthcare: physicians and hospitals, medicines, dental and vision, therapy. Insurance: automobile, health, life, disability. Educational expenses: courses, books. Children: day care, toys, child support, donations.

Collecting your spending analysis is just one part of the process. In order to determine the physical fitness of your decision to take on a home mortgage you may need to take action on the information that you have collected about your own current and projected expenses. Many people discover to their dismay that they are not saving enough money. You need to figure out how much you need to save for in order to accommodate any future goals that you have. For most people the answer lies in saving at least 10% of their Gross income before tax deduction. But depending on what you wish to achieve and how lofty your financial goals you may need to save more. Did you do not tabulate your spending they tell like this it is possible that you do not have any idea of how much amount you are saving. You should have these figures with you before you consider buying your first home or trading up to a more expensive property.

Maintenance Costs and Home Improvement Costs

Maintenance costs and spendings on any necessary or optional home improvement also needs to accounted for when you are calculating the budget for your home loan. Since these costs are as real as any other, they have to budgeted for as well in order to know well and truly how much you can afford as a monthly mortgage payment.

Managing Maintenance costs Of A Home

In addition to purchasing a home and meeting the monthly mortgage payment and paying for the closing cost, you also need to accommodate additional expenses which will be used to meet the upkeep of the home in your budget.*Requires painting, roof repairs and other kinds of maintenance over time. For budgeting purpose it is recommended that you allocate one percent of the purchase price of your home each year for normal maintenance.

If you put away this cost systematically it will avoid putting up tremendously high burden on you when something to the nature of a major repair comes up. Usually people ignore this fact completely and find themselves strapped for additional cash when repairs are required on the home. Certain homebuyers do not give maintenance of the homes much attention and therefore face lower selling price of the put their homes on the market.

So for example if you take out a mortgage of $200,000 on your home you should budget for about $2000 per year for maintenance. With certain type of housing such as condominiums you pay monthly dues into home owners Association which takes care of the contents of the complex. In that case you are only responsible for maintaining the interior of the unit. You can check with the Association to see how much the monthly maintenance costs are.

Financing Home Improvements

In addition to the maintenance costs you may also be inclined to spend on essential as well as nonessential home-improvement. An essential home improvement include the addition of a nursery for a baby while a nonessential improvement may include adding a deck, remodeling etc. Unless you have relaxed budget you may also need to save for these expenses. How much you will need to save will depend upon your requirements and plans. It is a good idea to contemplate the improvement that you need to make on the home a little bit in advance so that you can give yourself an opportunity to budget for it and save during the future few months.

Excess Mortgage Borrowing – Ask Yourself If You Can Afford It

Can You Handle Excess Mortgage Borrowing?

Many people believe that they can handle additional mortgage loan them what their mortgage lender may be able to approved them for based on the current income. To achieve their goal towards this purpose, they either borrow money from family or falsify and inflate their income on their mortgage loan application. While it is not necessarily true that you cannot stretch yourself when taking out a home loan, one would want you to take a more conservative approach and get in head over heels in debt, which would just increase your chances of default. While many homeowners who stretch themselves on their mortgage loan do just fine others end up in serious financial trouble.

Before you consider falsifying and inflating your income on the mortgage application you should know that the mortgage lenders crosscheck this information with the IRS form 4506T the result of which is that an increasing number of borrowers who lie on the mortgage application are caught and their applications for home loan is denied.

So while the lenders estimate of what you can or cannot afford, mortgage loan may or may not be accurate you should always give accurate and truthful information on what is known information. Doing otherwise is tantamount to committing fraud and perjury which could land you in serious trouble with the law.

Another aspect of your finances that the lender considers is your current obligation on various debts. These could be existing credit card bills, automobile loans, student loans, personal loans etc. Basically the lender tries to estimate how much money you need to spend on your get obligations every month because this in turn erodes the amount of money that you can devote towards making mortgage payments.

Calculating The Total Mortgage Payment That You Can Afford

Calculating the exact amount of money that you can afford as the mortgage payment every month can be difficult. Before you can calculate the mortgage payments that you can afford what you first need to do is you need to calculate the amount of money that you can devote every month towards your overall housing expenses. By having calculated your expenses and income every month you may have gained a fair idea of what this amount is going to be. In order to calculate what amount of mortgage payment you can make you need to consider several factors. Your overall housing expense is going to include things like mortgage payments, property taxes, insurance, house maintenance and even costs for potential improvements that you might want to make suggest adding an extra room, nursery for the baby or a study for yourself.

Many of these factors are variable factors. You can decide to spend less on more on one or the other in order to adjust your mortgage payment affordable amount accordingly.

What will also determine the affordable amount you can borrow is the kind of mortgage you choose and the interest rates that you get. If you take a mortgage with a lower rate of interest and for a longer period of time you will be able to afford a larger amount of money because your monthly mortgage payment would be that much less.

 

Income Tax Write-Offs on a Mortgage Loan

The federal tax authorities at the internal revenue service allow for tax deduction and tax benefits to be given to homeownership. The IRS and most state governments allows you to deduct mortgage interest and property taxes when you file your annual income tax returns within certain limits. You are allowed to deduct the interest on the first $1 million of the mortgage debt as well as all the property taxes. This mortgage interest deductibility covers both your primary residence and a second residence.

The IRS also allows you to deduct the interest costs on second mortgage known as home equity loans or home equity lines of credit, HELOC, to a maximum of $100,000 borrowed.

To simplify the way of doing things get a reliable estimate of tax savings from your mortgage interest and property tax write-off, multiply your mortgage payments and property taxes by a federal income tax rate. This approximation method works fine as long as you’re in the earlier years of mortgage because a small portion of the payment goes towards paying off the principal whereas largely the payment is for the interest on your mortgage which is completely deductible from your income.

Paying Property Taxes and Purchasing Home Owner’s Insurance

Paying property taxes and purchasing home owner’s insurance is an added expense that might have to bear when you close on a mortgage loan.

Paying Property Taxes

You also need to pay property taxes for you to click on. The taxes are generally paid to division typically called the county or the town tax collector. If you make a down payment that is less than 20% of the what is wrong you may have an impound account. Such an account requires you to pay property taxes and homeowners insurance to the lender each month along with the monthly payment. An escrow account may be created where the lender charges the insurance costs and property taxes for 6 to 12 months in advance. In the case of the escrow account / impound account the lender is responsible for making the necessary property tax and insurance payment to the appropriate agencies on your behalf.

Property taxes and insurance amount will depend upon the value of the property as well as the amount of the mortgage loan. Call up Your local government office to inquire about the property taxes by finding out the phone number in the government section of your local phone directory. Call up the relevant local tax collector’s office to determine the exact property tax rate in your area.

You should also inquire if any additional fees and assessments apply to buying a house in your particular area or county.

You should be aware of the fact that certain real estate listings contain details about the amount of tax that is being paid on the property by the current owner. However these taxes are usually based on an out dated assessment of the property and is therefore much lower. When you take on a new mortgage to purchase the home the lender will get the property reevaluated by doing an appraisal from a third-party. This will most likely result in a name and a much higher set of property taxes and insurance amount.

Purchasing Home Insurance

The cost of your insurance policy will largely depend upon the cost of your home. Basically it is the estimated cost of the building a home if it happens to get destroyed. As a homeowner it is also wise to get insurance coverage against possible damage, destruction or theft of personal property such as clothing, furniture, kitchen appliances, audiovisual equipment and any other items in the house that you consider to be valuable.

Although land has value it doesn’t need to be insured because it wouldn’t really get destroyed in a fire. Buy the most comprehensive homeowners insurance coverage that you can and take the highest deductible you can afford to help minimize the cost of insurance.

One of the reasons why lenders insist this additional investment from buyers is because they learned the hard way in the past that borrowers who cannot have much in the way of investment in their homes simply walk away when they cannot afford to make the mortgage payment anymore. This is something that happened in the late to thousands in the value of the home decreased to be less than the money that was old on the mortgage. The homeowners simply left the home to the lenders to bear the loss..

In case you cannot make a 20% down payment on the mortgage and yet do not want to pay for private mortgage insurance there may be a way to avoids this by using 80–10–10 financing. We will talk about this later.