TEXdot Realtors, Inc. encourages buyers to consider all of their living expenses when determining how much you can afford on a home loan.
Have you ever listened to Dave Ramsey on Houston KSEV 700 AM radio? If not, it's not too late to tune in from 2:00 pm to 4:00 pm live! With a rebroadcast later on in the evening.
The reason why I bring up Dave Ramsey, like many other financial people (Robert Keilholz (my father) and Steve Drake also from KSEV 700 AM radio) they encourages consumers to live within their means. This is a natural process for the Broker/Owner (Dorothy J. Wanko) of TEXdot Realtors, Inc. since Robert Keilholz stressed the importance of paying with cash and living within our means.
A quick synopsis is your mortgage should not be more than 25% of your monthly gross income. Gross is what you are paid by your employeer, and net is what you get (after taxes).
An example is you earn $4,000 a month, 25% of the $4,000 is $1,000. Your loan principal, interest, taxes and insurance should not exceed the $1,000 per month.
Many clients ask TEXdot Realtors since I am accustomed to paying $1,300 per month in rent, why don't I just take a loan that equals this amount? The only reason you would want to pay the $1,300 a month on a loan is if your gross monthly income is $5,200.
This is the way my father explained it to me. No matter how much you are paid: your house note or rent is 25% of what you make, Uncle Sam takes an additional 28% on taxes, which means your living on 47% of what you bring home. Less than half. This 47% still has to afford food, utilities, entertainment, clothing and savings.
Dad had two other sayings I like to pass onto home buyers. You should have 10% in savings of whatever the sales price you are buying. For example (you are purchasing $100,000 house), you need to have $10,000 in savings, in addiiton to your down payment. This is a slush fund you may need a new fridge, car, etc.
Dad also taught me to try to have 20% or more of any home I purchase. Why? The savings in monthly costs is asstounding, roughly $136 per month on mortgage insurance for those without 20% down. This fee (primary mortgage insurance or mortgage premium insurance) is in addition to principal, interest, taxes and insurance.
A couple formulas I would like to share:
The lender is going to use 28 – 36% of your gross monthly income.
Annual Salary X .28% divided by 12 = mortgage loan….
40,000 X .28 / 12 -= $933.33333
In reverse the lender will say, how much are you comfortable paying monthly. Say your lease cost you $1,000 per month…. (I don’t recommend telling them the exact figure you are willing to go up to).
Then take the $1,000 X 12 divided by .28 = $42,857. Is how much you need to gross from your annual income.
My all time favorite books to read is "The Richest Man in Babylon". Email TEXdot Realtors, Inc. and we will send you one for free! This book will teach you how to manage your money as you earn. Watch it grow and see the power of money.
If you are a person that has found yourself in credit card debt, try reading "The Automatic Millionarre". Skip to the middle, read the chapter about analyzing your credit card debt, which card to pay off first!