What Can I Afford?
"Almost" the first step in buying real
estate
This is clearly a
personal choice, however, there is some common sense advice and
there are guidelines on how much lenders will loan you that will
help you determine how expensive a house you wish to purchase.
You must be thoroughly comfortable with your total monthly payment
and meet lenders' qualification guidelines.
As "a rule of thumb", lenders will
qualify you for a real estate loan when your total monthly payment
(principle, interest, private mortgage insurance (PMI), taxes,
insurance and any association dues) are not more than 33% of your
gross monthly income, and that your total monthly installment
payments (car loans, credit card payments, etc.) plus your real
estate mortgage payment do not exceed 45% of your gross monthly
income.
With this figure as
your upper limit, set your own maximum monthly payment. This
will then determine the maximum loan amount for current interest
rates. I suggest that you practice "paying" this amount for 6 months
before you buy. If this new amount is larger than what you are
paying now, put the difference into savings. It will come in handy
when you do buy to cover down payments and closing costs (see
below). If you can easily make this payment without having to dip
into the accumulating savings, you are likely to be able to meet
this payment over the long term.
Now, to determine the
maximum price for your new Massachusetts home, you need to take into
account the following one time costs: down payment, earnest money,
lender's fees, closing costs, inspector's fees and moving costs.
You
will need the earnest money, money for inspections and money for any
loan application fees available before you start your home search.
Down
Payment
The amount of money you
wish to add to the amount you borrow that together set the
purchase price. This money is due at the signing of papers or
the "close". Loan programs are available for 0%, 3%, 5%, 10% & 20%
or more as down payment. The more you put down the less the
payment and often better terms. For real estate loans with down
payments of 20% and more, lenders do not require private mortgage
insurance (PMI).
Earnest
Money
The amount of money you
put forward at time of offer and at time of signing the purchase and
sale contract (different than the close) that is held in escrow
until the close. This money is then applied to your down payment
and/or closing costs at time of closing. Earnest money provides the
seller confidence that you are serious in your intent to complete
the purchase. It is the seller's only recourse to cover expenses and
lost marketing time should you default on your agreement to complete
the sale. Usually it is not advisable to tender more that 5% of the
offer price, although there are conditions where you may want to
sway the seller with a higher number. In a buyer's market, sellers
may be willing to accept offers tendering less than 5%. Your
agent will be able to advise you. Contingencies in your offer to
purchase (be sure your agent includes these) covering inspections
and financing will state these monies will be returned to you if the
inspections turn up latent defects in the house that are
unacceptable to you or for which the seller will not remediate or if
you can not secure financing within the terms of the contingency
clause.
Lender's Fees
Fees charged by your
lender that include but not limited to: application fee, appraisal
fee, prepaid interest (points), underwriting fee, copying fees (can
you believe it!), and others. Not all lenders charge these fees. You
should be very careful to get assurances of what costs you will
incur before you make your application and pay the application fee
(and often the appraisal fee). You also need to determine if you are
dealing with the actual lender or with the lender's representative
(mortgage broker). A mortgage broker may not be able to commit to
you what the final lending fees and closing cost will be other than
those fees charged by the broker. In this case you will need to get
a commitment from the lender directly.
Closing
Costs
Costs charged at
closing include monies to cover title search, title insurance,
attorneys fees, recording fees, and the prorating of property taxes
and any remaining heating fuels. This list is not exhaustive,
but covers the primary expenses. Here again your lender will advise
you.
Inspector's Fees
It is highly
recommended that you have any house you wish to purchase inspected
for structural problems, pest infestation, lead paint presence, and
the presence of Radon gas. Additionally, if the home has a private
water source, you will want to have the water supply tested for
quality and quantity. In Massachusetts, it is the sellers'
responsibility to inspect private sewerage systems and certify
compliance with state regulations. Inspections are to be completed
shortly after an offer has been accepted. Typically, they are to be
completed within two weeks. Fees for structural, pest and Radon
inspections total in a range of $300 -500 depending on the size of
the home. For a better estimate, I recommend that you contact firms
in this business. Call me for recommendations.
Moving
Costs
Hard to give you an
estimate on this. Best to get estimates from a number of
movers. Again, call me for recommendations of local moving
companies.
A quick
rule-of-thumb on how much house you can buy with your monthly mortgage budget at
6.5% interest rate is to divide your budget by $8.00. This will give you the
number of thousands of purchase price. Example: $2000.00 monthly budget =
$250,000 plus your down payment. This covers principle, interest, taxes and
insurance (not PMI).
Copyright©
2006 - Chris Kellogg
All Rights
Reserved
Last Modified
05/16/2007 |
