Sugar Blossom

Can You Rely on What the Home Lender Says?

Yes.

And no.

Yes, in the sense that today lenders use highly sophisticated computer models based on hundreds of thousands of actual case histo­ries to determine what makes a successful borrower. Where you ?t in that ?nancial pro?le determines the maximum amount that you can borrow. And if you ?t the pro?le of a successful borrower, chances are excellent that you will be one. On the other hand, if you ?t the pro?le of someone who’s likely to lose the property to foreclosure, then you might reconsider renting.

However, the one thing the computer and the modeling and the pro?ling can’t tell you is how big a monthly payment (and how big a mortgage and price) will be within your comfort level. For example, the computer may spit out that you can afford a $3000 monthly payment. But, you know from experience that making a house payment of more than $1500 would keep you from sleeping at night. Who’s right? You or the computer?

Stretching Makes Sense In An “Up” Market

If you are looking at homes after having been out of the market for quite some time, you’ve probably run into “sticker shock.” The prices for today’s home can be much, much higher than you paid for your old castle. However, your income may have increased suf?ciently to handle the new price/payments. Further, even if you have to stretch to make the payments, if the market is moving up, it might be worthwhile. In a rising market, the value of your new home, and your equity, will quickly grow.

Try a Reality Check

Okay, now it’s time to take a realistic look at your budget. What can you really afford?

It’s not hard. Just calculate your total spendable monthly income. That’s what you get after taxes, alimony, and other amounts are taken out. Now subtract what the computer says you can afford monthly and see what’s left. Can you really live on that for a month?

Don’t Forget To Factor In Tax And Interest Deductions

Remember, you can deduct the interest on your mortgage (up to very high limits) and your property taxes from your ordinary income. By adjusting your W-4 form with your employer, you can factor this in and get a higher monthly take-home paycheck. Be sure to ask your accountant.

Your Reality Check

Take home pay (after increasing for mortgage interest and property tax deductions) $______ Monthly payment (including taxes and insurance) as determined by the lender $______

What’s left for you? $______

Few people want to radically change their lifestyle in order to buy a home. Those with long memories will recall families in the 1970s who bought homes and then sat on the ?oor inside because they couldn’t afford furniture. Nobody wants to be in that position. So be realistic with the numbers.

Take a few minutes to determine what your actual monthly living expenses are. Don’t forget medicines, entertainment, eating out, and so on. On the other hand, for a home that might bring you strong appreciation (read pro?t) in the future, you might very well want to give up trying to live a princely lifestyle. What you need to decide is what you can live without, and what you absolutely must have.

[tags]home lender, buy a home, monthly income, mortgage, property tax[/tags]