Borrowing
to purchase is not only acceptable, it's desirable. Even people buying
millions of dollars' worth of real estate borrow to make the purchase.
There
are two types of costs in buying a home:
- the
amount of money you'll need for the initial purchase; this consists
mainly of the down payment and other costs such as legal fees
and taxes; and
- the
ongoing costs of paying back your mortgage, along with monthly
operating costs for utilities, maintenance, insurance and annual
property taxes
Costs
of buying a home equals:
- Down
payment;
- Mortgage;
- Legal fees;
- Utilities;
- Inspection
fees;
- Maintenance;
- Taxes;
- Insurance;
and,
- Property
taxes.
When
lenders assess your ability to buy, they look at your ability
to pay both types of costs in determining how much money they
will lend you. Before you ever visit a lender, you can predetermine
this amount, using the same formulas they do.
Lenders use several factors in judging your ability to handle
a mortgage, including your income, employment record and credit
worthiness. However, one way you can estimate the price range
you can afford is to look at the amount of money you have available
for a down payment.
The most common mortgage is a "conventional mortgage."
In this type of arrangement, lenders will loan up to 75 per cent
of the "appraised" value (estimated market value) of
the property or the purchase price - whichever is lower. The remaining
25 per cent is the amount you will contribute as down payment.
If you want to buy a home that has an appraised value of $200,000,
a lender may loan you 75 per cent or $150,000 on a conventional
mortgage when you contribute a down payment of $50,000.
If you plan to borrow funds through a conventional mortgage, multiply
the money you have available for a down payment by four. For example,
if you have access to $40,000, you may be able to purchase a home
with an appraised value of $160,000 ($40,000 x 4 = $160,000).
This assumes, of course, that you have sufficient income to make
the payments on a $120,000 mortgage (75 per cent of $160,000).
Most lenders will not permit a borrower to take on a debt load
the borrower can't carry. That's why reputable lenders "qualify"
potential borrowers before issuing mortgages.
Most lenders say that your monthly housing expenses (mortgage
payment and taxes), plus condominium maintenance fee, if applicable,
would not exceed 30 per cent of your monthly gross family income.
This
is called your Gross Debt Service (GDS) ratio. Some lenders will
go as high as 35 per cent, depending upon a number of variables.
Lenders also use a second calculation in qualifying you for a
mortgage. It's called the Total Debt Service (TDS) ratio. Generally
speaking, no more than 40 per cent of your gross family income
may be used when calculating the amount you can afford to pay
for mortgage payments and taxes plus other fixed monthly expenses.
These other fixed costs are your ongoing commitments and can include
auto, student or personal loans, as well as revolving charge accounts.
Again, the 40 per cent calculation may vary slightly among lenders.
By knowing exactly what you can afford, you can make your home
purchase with confidence.
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