Setting a Home Purchase Budget

One of the most common questions we get is “How much can I qualify for?”  I consider this a very dangerous question because it assumes if the borrower can “qualify” for the loan, they can easily make the payments.  In fact, the “qualification” system is set based on the assumption that the borrower knows how much they can afford and will take responsibility for making the payments.

Although I have not had any communication explaining the specific thought process behind the automated approval system, years of dealing with loan files allows me to make some reasonable guesses.  Top of the list is that a significant number of borrowers have income that is not documentable for loan purposes.  Examples might be investment income, rental income, royalty income, overtime, self employment, or boarder income without the required history showing on a tax return .

Another reason is that the United States has been blessed with steadily rising income for several decades.  Some of this is due to inflation.  Some is due to real wage gains.  In either case, the future ability to make payments has steadily risen.  Absent inflation, this may not be as true in the future.

What we see is the allowable debt to income ratios being reduced in an effort to reduce the number of defaults.  Issues such as payment shock (the amount of payment increase) are being evaluated more carefully.  Even with these changes, we still recommend the borrower carefully evaluate their maximum payment separate from what can be approved.

For first time buyers, we recommend starting the budget process with the amount the buyer is currently paying in rent.  Add the amount going to savings each month, and subtract the average monthly increase in debts over the last year.  A good way to determine average savings is to compare total debts and total savings a year ago with today’s numbers.  If today’s total savings are higher than the year ago total, divide the change in savings by 12 to get a monthly number to be added to the rent.  If today’s debts are lower than the total debts a year ago, it indicates savings going to pay down debt.  Take the change over the year, divide the number by 12 and add it to the rent to get a sustainable housing payment.  Similarly, subtract the numbers if today’s debts are higher or savings lower than a year ago.  This number will result in an upper limit on the amount of money available for a house payment.

The above amount should be adjusted to account for expenses currently paid by the landlord such as the water bill, lawn maintenance, and building maintenance.  Moving into a home often means buying additional furniture, or decorating items such as drapes or paint.  Depending on the property, additional tools or equipment such as a lawn mower may be required.  It is not uncommon for the same life changes causing the move to a new home to also result in the purchase of one or more new vehicles.  These expenses add up and will be in addition to the house payment.  Having room for these expenses in the budget will increase your ability to enjoy your new home.  Conversely, if all available money is committed to the house payment, the stress of making the payments can take the joy out of owning your new home.

When setting the down payment budget, don’t forget about closing cost requirements (often about 3% of the purchase price), and moving expenses.  In some cases, it is possible to negotiate a purchase price with the seller paying the closing costs.  The agents we recommend all know how to negotiate this.

Call Don at 303-469-1254 with your desired monthly payment and down payment.  He will be happy to calculate the price of the home that fits your budget, including estimated taxes, insurance, and HOA dues.  This is a good place to start when requesting a loan pre-approval.  By getting the loan in place first, you can shop for a home knowing that as long as the price is below the budget, the down payment and monthly payments will fit within the budget.

For repeat buyers, the process is the same as the above, except it is necessary to estimate the amount of cash available from the sale of the old home.  While the real costs may be less, we recommend starting with a close estimate of the selling price.  Reduce this price by 10% and subtract the current loan balance.  The 10% is intended to cover seller’s closing costs, real estate commissions or owner’s marketing expense, negotiating concessions, and other expenses of sale.  Preparing the home for market, repairs, and moving expenses will be additional.  Call Don if you would like some quick ways to estimate the value of your home.

Don Opeka – President
Licensed Colorado Mortgage Loan Originator  MB100007878
Colorado Certified Mortgage Broker

Orion Mortgage, Inc.
10560 Wadsworth Blvd.
Broomfield, CO 80021
303-469-1254
800-404-0453
www.OrionMortgage.net
Don@OrionMortgageInc.com

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