The purchase of real estate is both an investment
financially and emotionally. While you can find greater returns for
your money, this investment provides you with a house to live in and
a place to call home.
There are many benefits to owning a home, including
tax breaks for having a mortgage on the property. But homeownership
isn't right for everyone. When your plumbing goes wrong or roof
leaks, you will have to pay for the repairs. While renters can come
and go, selling a home often takes time and money.
You don't have to be stuck in renting or
homeownership, there are alternatives. You can purchase a home
through seller financing, lease with option to buy and contract for
a deed. Often, it all comes down to not if you want to buy, but how
much you can afford to buy.
Most mortgage lenders will only qualify you for a home
mortgage if your monthly housing payments will remain below 28% of
your monthly gross income. The monthly housing payments include the
principal, interest, property taxes, mortgage insurance and
homeowners insurance. This amount is often referred to as your
housing expense ratio or front-end ratio.
The total sum of all of your monthly debt expenses
should remain below 36% of your monthly gross income in order to
secure a mortgage. This is called the debt-to-income ratio or
back-end ratio. The debts include your housing payments, auto loans,
credit card debt, student loans, child support, alimony and other
loan obligations.
The ratios are simply a guideline that most lenders
follow. Each homeowner is considered independently. Some may qualify
for loans that allow higher ratios. For example, if you have no
other debt, you may be able to get a loan with a higher front-end
ratio.
When you apply for a mortgage, the
lender will need to know an estimate of how much you will pay for
property taxes and homeowners insurance. These and other key
elements of monthly mortgage payments are defined in the next
chapter.
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