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  • March Article: Real Estate 150

    By Dr. Ana Machuca, Full-Time Faculty 
    Published March 2014

    How much home can I afford?

    How much house you can afford is usually determined by your debt-to-income ratio. There are four components that make up the mortgage payment: principal, interest, taxes, and insurance  (PITI). A general rule is that these items should not exceed 28 to 30 percent of the borrower’s gross income. Some lenders may go as far as 40 percent with a high enough down payment and good credit. Some of the items considered as debt by the lenders are the mortgage, car payment, credit card debts, child support, and alimony. For example, if you earn $60,000 a year, that is $5,000 a month multiplied by .30 (30 percent debt-to-income ratio) = $1,500. Therefore, after the mortgage, car payment, credit card debts, child support, and alimony your total debt in this income category should not exceed $1,500. If you already pay $300 for a car payment and $300 in credit cards, then you can afford a monthly payment of $900. If there are two incomes, you would combine them and do the math again. The best people to help you make this decision are your realtor and your mortgage broker. 

    What are closing costs?

    Closing costs are costs associated with processing the loan that are paid on the date you close on the home. These costs can include taxes owed by the owner, processing fees, lender fees, insurance payments owed by the owner, title searches, attorney fees, title company fees, appraisals, and surveys. The buyer does not pay the realtor commissions. These closing costs are usually 3 to 5 percent of the cost of the house. Many times if you buy a new house from a builder, the builder will pay most of these costs. Sometimes you can also negotiate the payment in full or a contribution from the seller in your contract.  

    What is included in my monthly payment?

    Your monthly payment will consist of principal, interest, taxes, and insurance (PITI). Mortgage insurance is added if applicable. Your lender will collect your home insurance for your designated insurance company and your property taxes each month and put the money in an escrow account where it will be held until payment is due. Once payments are due, your lender will make the payments on your behalf to ensure their investment is not in default of payment. Both the taxes and insurance amounts are estimated until the bills are processed and paid by the lender. Usually at the end of the year your lender will do a reconciliation of your escrow account and issue you a refund or send you a bill for any differences found.

     

     

    Dr. Ana Machuca is a full-time faculty member at Kaplan University. The views expressed in this article are solely those of the author and do not represent the view of Kaplan University.

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