Now get out your bills and total them up to determine what you spend monthly on debt. Do not include your auto insurance or your utilities. For credit cards, use the minimum required monthly payment unless it is less than ten dollars.
Deduct that amount from the total the lender wants you to spend on housing costs and consumer debt combined. Now you know the maximum the lender wants you to spend for housing costs, unless the figure is greater than 33% of your monthly income. The next step requires a little guesswork. If you have a vague idea of what price you might qualify for, you can estimate what your annual property taxes and homeowners insurance might cost. From there, you can easily calculate the monthly equivalent. Subtract those figures from your maximum monthly housing costs total. If you are buying a condominium, subtract out an approximate figure to cover homeowner’s association fees.
Now you have to go to a mortgage calculator and plug in some numbers. In the "payment" area, put the figure you just calculated. Plug in the current fixed interest rate. If you are putting less than twenty percent down, add a half percent to the rate to allow for charges you will pay for mortgage insurance.
Hit the calculate button and you should have your maximum mortgage amount. Add your down payment and you know your maximum purchase price. You may have to do some fine-tuning to zero in on the exact figure. In addition, lenders know how to "stretch" a client a bit higher if they need it.
If the figure is less than you expected, lenders know programs that will help "boost" you higher in qualifying. In addition, they will do what you just did free, they are much more experienced at the various nuances involved, and you will have no obligation to use them as your lender.
Determining how much money you have available for down payment and closing costs affects almost every aspect of buying a home, including how you write your purchase offer, the loan programs you qualify for, and shopping for interest rates.
If you only have enough available for a minimum down payment, your choices of loan program will be limited to only a few types of mortgages. If someone is giving you a gift for all or part of the down payment, your options are also limited. If you have enough for the down payment, but need the lender or seller to cover all or part of your closing costs, this further limits your options.