Are you interested in purchasing a home in the Temecula area? With it’s great weather, famous wine festival, historic attractions, and thriving tourism and recreation industries, Temecula is a great place to live. Before taking the plunge into home ownership, though, it is important to be prepared.
A real estate investment is likely the largest and most significant purchase many people will make in their entire lives. Before you start actually going out and looking at properties, the first thing you need to know is how much home you can responsibly afford. While figuring this out may seem daunting at first, there are a series of simple steps you can follow to arrive at a specific dollar amount.
What is the Housing Ratio?
This first thing you need to look at is the housing ratio. Simple put, the housing ratio is the percentage of your gross income that you will spend on housing each month. Financial planners suggest that this be between 28 and 30 percent. Your mortgage payment will comprise the lion’s share of this amount, but insurance, utilities and maintenance costs should also be factored in.
For example, suppose your annual income is $70,000. First, divide by 12 to get your monthly income. In this scenario, that comes to $5,833. Then, multiply that number by .3. That gives you a housing ratio amount of $1,750. This is how much you should plan on paying each month toward your home.
What is the Total Debt Obligation Ratio?
The total debt obligation ratio is another important number to keep in mind when determining how much home you can afford. This ratio is the total amount you have to pay in debts every month relative to your total monthly income. This calculation includes credit card payments, student loans, alimony, child support, car payments, and anything else you’re stuck paying every month in addition to housing costs.
According to most experts, your total debt obligation should be between 36 and 40 percent. If it’s higher than this, waiting to buy a home home until you’re able to pay off a good chunk of your debt is highly recommended.
What is a Down Payment Percentage?
This is the lump sum that the buyer puts down at the time of home purchase. A down payment of 20 percent of the total cost of the property is considered the standard, recommended amount. It is possible to get a mortgage with a smaller down payment, but you’ll have to buy private mortgage insurance to offset the additional risk to the lender. This insurance will bump up your monthly mortgage payments and is best to avoid if at all possible.
Of course, if you can afford to put down more than 20 percent, that’s great. A higher down payment generally translates to a lower monthly payment.
Additional Factors to Consider
Your credit score is important when shopping around for a mortgage. Just like when applying for a new credit card or a personal loan, a higher credit score can dramatically improve the offers that you get. At a minimum, be sure to check your credit score either online or by phone before beginning the mortgage application process.
Planning for the Future
Buying a home is a major decision with considerations that extend beyond the financial. Even if you can afford to buy a home right now, you should take some time to think about how it fits into your personal goals and overall life plan.
Only consider buying a house or condo if you’re very confident that you’ll be staying in the same place for a long stretch of time. If your job requires you to move around frequently or if your employment situation is unstable, for instance, renting is probably a good choice for the immediate future.