Can you really afford that house?

Trey Bowden
The Edmond Sun

EDMOND March 15, 2008 11:15 pm

— I regularly talk with Realtors who ask me to visit with some of their customers to get them pre-qualified to purchase a home. Most of their customers I talk with have little or no clue how much house they can afford. Either they are looking at houses way above their monthly budget, or they think they couldn’t qualify for the home they really want, and actually could.
Well, here’s a step-by-step formula that anyone can use to see just how much home they can afford to buy. Notice, I didn’t say simple formula. You’ll most likely need a calculator and something to write on.
Here is the basic information you’ll need to make the proper calculations.
• Annual gross income: If you are a W-2 employee this is fairly simple, just pull out your W-2 for past year and then compare your current year-to-date figures from your latest pay stub. If you are self-employed or your income is all commission, you’ll need to average the past two years’ tax returns.
• Monthly non-mortgage debt payments: This includes the minimum payments due on all credit cards as well as the total monthly payments due on car loans, boat loans and student loans whether or not they are in forbearance. If it shows up on your credit report, you most likely need to count it.
• Money you have available for down payment and closing costs: These monies need to be verifiable. In other words, they need to be in some type of account instead of sealed in a coffee can buried in your backyard.
• Mortgage term: For this article, we will work with 30 year.
• Interest rate: Again, for this article we will use the interest rate of 6.25 percent as an example.
• Annual property taxes: If the property is in Oklahoma County you easily can find out the annual property taxes on any property by navigating your Internet browser to www.oklahomacounty.org/assessor/ and clicking on the search records link and select live property records. Enter the address of the property and then click the box just below the pictures of the house for tax information.

Doing the Calculations
Multiply your gross annual income by .40, which is the maximum recommended housing ratio. Let’s use an annual income of $75,000 x .40 = $2,500. Next subtract from this figure the total amount of your monthly non-mortgage debts. Let’s use the figure of $700. That leaves a sub-total of $1,800.
Finally subtract the amount of property taxes and home owners insurance. You can find a close approximation for this amount by multiplying the loan amount by 1.85 percent — this will give you an annual estimated amount — then dividing that figure by 12. For our example, this amount is $370, which when subtracted from $1,800 leaves us with $1,429 for an allowable monthly principal and interest payment.
Now remember, we’re using a 30-year fixed rate of 6.25 percent as our example. You can quickly calculate an estimated principal and interest payment by multiplying $6.16 per $1,000 of your new mortgage. In other words, if you multiplied $6.16 by 232 (a loan amount of $232,000) you would arrive at a monthly principal and interest payment of $1,429. By adding the amount of money you have available to use as down payment, you get a ballpark idea of the amount of home you can afford.
Following this calculation in no way qualifies you for a home mortgage; it simply serves as a guide to help you know how much house you can realistically afford.
Before any serious home shopping is done you should make an appointment with a trusted mortgage lender and complete a residential loan application. Once you are pre-approved with a lender you’ll be given a letter to use to let any Realtor or home seller know that when you make an offer on their house that you are serious.

TREY BOWDEN is a licensed mortgage professional in Edmond.