The idea of buying a home can be exciting, fun, frustrating, and confusing, all at the same time. And while it’s easy to get caught up in the emotions of it all, an important question needs to be asked and answered first: how much can you afford on a house?
You may have a six-bedroom, five-bathroom colonial house in mind, but can you afford it? And when it comes to the best homeowners insurance, how much will your homeowners insurance policy cost? There are many home-buying factors to consider before you start reaching out to real estate agents, and figuring out how much house you can afford is a good first step.
Know When to Buy
When buying a house, some homebuyers may be holding out so that the market is more favorable for them. This is true as different times of year can present better times compared to others when hoping to buy a house.
The best time of year to buy a house can depend on a number of factors including the economy, region, and anomalies, such as the COVID-19 outbreak. However, in general, the house-buying market usually favors homebuyers during the spring and summer seasons. What this means is that potential homebuyers can take advantage of cheaper prices, more houses to choose from, and better lending ratios. These can all combine to provide a better mortgage payment at the end of the day.
Know Lender Ratios
One thing to know off the top is that it’s not so much about the total price of the house for sale, rather it comes down to the mortgage payment you can afford to take on. This is especially true for a home with a high homeowner’s association fee that will end up costing you more per month than a similarly priced home without an HOA fee.
Lenders usually use a couple of different methods to calculate how much they are willing to lend to new homeowners. For the homeowner, this means that they are limited to whichever method produces the lower monthly payment amount.
First, there’s the front-end ratio which means that a new mortgage payment is a percentage of a homebuyer’s gross income, before taxes. The back-end ratio is more complex and refers to a total monthly debt as a percentage of gross income.
For front-end ratios, the industry standard is 28% and for back-end it comes in at 36%. Depending on a homebuyer’s credit rating, employment situation, and lender policies, these percentages can come in at a higher rate.
Front-End Ratio Maximum Payment
To calculate your front-end ratio, divide your annual income by 12 (pre-tax income), and then multiply this by .28 (28%). This refers to your total mortgage payment, not principal and interest. Most people pay property taxes and other items like hazard insurance together with their monthly payments.
It’s important to factor in your monthly debts to make sure you can actually afford a mortgage payment. If a $1,500 mortgage payment sounds like a great deal, you still need to factor in monthly debts to make sure there’s room in your overall budget.
Before you can tally up your back-end ratio, you need to consider these monthly debts. These include monthly car payments, lines of credit and credit cards, other loans, child support obligations, and student loans, for example.
Back-End Ratio Maximum Payment
Much like the front-end ratio payment, you’ll use a bit of math to calculate your back-end ratio mortgage payment. Take your annual income, divide by 12, then multiple by .36 (36%). Subtract your monthly debts from this amount and you end up with your back-end ratio mortgage payment.
Always Use the Lower Payment
Your lender will always use the lower of these two ratios as your upper limit. Because mortgage rates change on a constant basis, and other factors will be considered including property taxes and home insurance rates, it’s complicated when trying to set a maximum dollar amount for your mortgage budget. Make sure to find out whether a property is part of an HOA and include this expense in your considerations.
What About Homeowners Insurance?
While having a good understanding of what to expect with mortgage payments can help in your house hunt, it’s just as important to understand the importance of obtaining the best homeowners insurance policy you can get for your new home.
You might be asking, how much is a homeowners insurance policy? And what does it cover? Fair questions, as these and other questions can determine where you turn for coverage in your area.
The best homeowners insurance policy for your home depends on a few things, including how much home you’re protecting and what exactly you want covered. Some homeowners pay high rates to protect their most valuable assets while others may end up paying less than $35 a month. To determine this number for you, insurance companies use several rating criteria to determine an annual home insurance premium.
There are regional considerations to take into account, such as weather patterns and flood and earthquake potential. A homeowners insurance provider like Byrnes Agency will be able to walk you through this process and help you determine what needs to be covered from major damage or loss when buying a house.
Having this kind of coverage can help you have peace of mind when looking to keep everyone safe and sound under your new roof.
About Byrnes Agency
At Byrnes Agency, we offer insurance solutions that can be tailored to meet your specific needs. Whether you’re looking for personal policies or commercial coverage, we have the right coverage for you. To learn more about our products, contact us today at one of our two locations.
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