RESOURCES








GETTING STARTED

2. What can you really afford?


Determine how much home you can afford, including a down payment and closing costs



How much can you afford?

Lenders will calculate a ratio of your income to the monthly cost of the home. There are two main ratios lenders look at: Housing Expense Ratio and Debt-To-Income Ratio.


Housing Expense Ratio Compares housing expenses to pre-tax income
Target: under 28-31%

How to calculate:
Take your monthly PRE-tax income and divide it by the cost of the housing payment. In the housing payment amount, be sure to included taxes, insurance, association fees, and PMI.

Most traditional lenders want a ratio under 28%, but the highest a lender will accept is a 31% ratio for loans backed by Fannie Mae and Freddie Mac.

Calculate your housing expense ratio here:


Debt To Income Ratio Compares housing expenses AND other monthly expenses to pre-tax income
Target: under 36-43%

How to calculate:
Take your monthly PRE-tax income and divide it by the cost of a housing payment (including taxes, insurance, association fees, and PMI) PLUS other monthly debt payments like credit cards, car loans, student loans, and even child support.

Most traditional lenders want a ratio under 36%, but the highest a lender will accept is a 43% ratio and for loans backed by Fannie Mae and Freddie Mac.






Start Saving

You will also need to start saving – not only for your down payment, but also for closing costs which can run between 2-5% of your loan amount.


Down Payment

Ideally, lenders want a down payment of 20% of the home’s sale price but you can go as low as 3.5% with a Fannie Mae loan. However, loans with less than 20% down will have additional costs like PMI. These mortgages can take longer to close and are more likely to fall through, so some sellers may be reluctant to sell to a buyer with a low down payment.

PMI costs average $30-70 per month for every $100,000 borrowed.


Closing Costs

One of the biggest mistakes homebuyers make is not budgeting for closing costs. These are extra costs like fees and taxes, inspections, appraisals, and surveys.

YELLOW provides an estimate of these costs for every listing. Click on the 'Cash to Close' link in the listing page to get an estimate of the closing costs.







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