Required Financial Information
Before you begin calculating how much money you need there are a number of factors that must be taken into consideration. Home ownership comes with more than a mortgage payment. Home ownership will require payments for taxes, insurance and in the event of a condominium purchase, homeowner association fees. Additional expenses include home repairs, maintenance, water bills and other everyday expenses.
Home ownership comes with serious financial responsibilities and for most, this will be a commitment for as many as thirty years. The decision to buy a home is not one that should be taken lightly, it is a life altering decision.
Judging Financial Fitness
In order to determine how much money you can afford to spend on your home you will need the following information:
Income - Income from all sources should be taken into consideration. If you are currently a two-income family, calculate annual income. Income from annuities, rental income and other sources should only be included if you can prove that they will continue for a period of at least twenty-four months (your lender may require additional time).
Assets - While your assets will not play a significant role in how much money you can borrow, they will be required to determine your overall financial fitness. Assets must also be included on your loan application (Form 1003). Make sure you include such items as vehicles, antiques (that you have certified appraisals for) and high-priced jewelry (that is appraised). Life insurance policies that are fully paid up may also be included.
Expenses - In addition to your assets you will need to create a complete list of your debts. This list should include payments on life insurance, automobile loans, credit card debt and any other type of loan that you are liable to pay for more than six months. The easy rule of thumb is if you owe it, add it to your list.
Additional expenses which are often overlooked include payments on medical insurance (not covered by work), dental plans, vision plans and student loans. All of these payments must be accurately listed on your home mortgage forms. The more accurate your list of debts, the easier it will for you to determine how much may be borrowed to purchase your home.
Down Payment and Amount to Borrow
The down payment will also be a consideration. Down payments (in general) should be at least five percent (5%) of your purchase price. Depending on other factors such as your credit rating, property type and home value, this amount could potentially be higher. The source of your funds for your down payment should also be noted. Some potential homebuyers will use money from a 401(k) towards down payment, others will have saved the amount over time and others may have had the down payment (or portions of their down payment) gifted to them.