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How to determine how much you can spend on a new home

MMI Copywriter

By Kim McGrigg, MMI Community Manager

Before you begin the home buying process, it’s important to determine exactly how much money you can afford to spend on your new home. Knowing this information up front can save you a lot of time and effort and is one of the keys to long-term successful homeownership.

To determine how much you can realistically afford, you’ll want to determine how much you have for a down payment. In general, you will need to have at least 10 percent of the home’s price for a down payment. If you want the best loan terms, you should plan to have at least 20 percent for a down payment.

When making lending decisions, banks also consider the cost of housing in comparison to your income. Your monthly housing expenses, including your mortgage, taxes, and insurance, should be no more than 28 percent of your monthly income. Of course, your other debts also play a factor. In general, lenders want your total debt-to-income ratio – which includes things like credit card debt, child support payments, and student loans – to be no more than 36 percent.

So, in addition to a good credit history, these are some of the things that lenders are looking for. But it is very important to remember that qualifying for a loan and being able to afford that loan are two different things. Before you make such a large commitment, you’ll want to consider a number of other factors. For example, what are your other monthly expenses? And how secure is your income? In other words, what is your comfort level?

Keep in mind that there are some hidden costs of homeownership that you’ll need to factor in to your budget when you become a homeowner such as maintenance costs, association dues, and utilities.

 

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Money Management International (MMI), a HUD-certified housing counseling agency, is celebrating National Homeownership Month throughout June by providing potential and existing homeowners with valuable tips and tools. Visit the updated Homeownership and Home Loans section of MoneyManagement.org to learn more. 

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Behind on your mortgage? Have a friend or family member who is? The federal government's new HUD relief program may be able to help. The experts at Money Management International can assist with the application.

HUD’s Emergency Homeowners’ Loan Program (EHLP) will provide up to $50,000 of mortgage payment relief for qualifying homeowners in the form of a zero interest forgivable loan. The deadline, July 22, is approaching fast. Contact MMI for more information and assistance.

Click here for information on the EHLP

 


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Evaluating the reverse mortgage option

 

Reverse mortgages have received significant attention recently – even big-name celebrities are taking up the cause in infomercials. With the baby boomer population reaching retirement, it’s likely demand will only increase. A reverse mortgage is a great option for some seniors, but isn’t for everyone. The concept itself is somewhat complicated. For those considering a reverse mortgage, here is some information to consider.

What is a reverse mortgage?

reverse mortgage is a loan taken out against your home while you are still living in it. It doesn’t need to be repaid until the homeowner dies, permanently moves out, or sells their home. Terms vary, but can include a lump sum, line of credit, or periodic payments. Reverse mortgages are available from private lenders, from the U.S. Department of Housing and Urban Development (HUD), from some nonprofit organizations, and from some state and national government programs. Homeowners retain the title to their property and must continue insurance and tax payments. Usually with a reverse mortgage, you don’t risk losing your home while you are up to date with insurance and tax payments, as long as you continue to live in the home.

How much do you get for a reverse mortgage?

The amount of money you get depends on the current market value of your home. However, you shouldn’t expect to receive the full value, instead you’ll likely get a percentage of that value. Interest accrues, so the amount you’ll owe continues to grow over time.

Counseling

To be considered for a reverse mortgage, HUD’s Federal Housing Administration (FHA) requires that you participate in a counseling session with an approved nonprofit housing counseling agency. At completion of the session, the counselor will issue you a certificate that must be provided to the lender you choose. At MMI, we have counselors certified by HUD who specialize in helping consumers, 62 years of age or older, explore and evaluate this financial tool. It’s important to understand the financial and tax implications, payment options, and costs associated with a reverse mortgage.

Should I consider a reverse mortgage?

Many seniors benefit from this option; however, the decision should be made carefully. Consider all options – there may be something less expensive that will work better. Reverse mortgages usually have up-front fees, so they aren’t always the best option for a shorter-term loan. You’ll need to take some time to consider whether you want to use your home equity. Talking to heirs or a financial planner might help you with the decision making process.

If you do decide to take out a reverse mortgage, do some research to find a highly recommended lender that offers competitive rates.


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About Money Management International

Money Management International (MMI) is a nonprofit, full-service credit counseling agency, providing confidential financial guidance, financial education, counseling, and debt management assistance to consumers since 1958. MMI helps consumers trim their expenses, develop a spending plan, and repay debts. Counseling is available by appointment in branch offices and 24 hours a day, 7 days a week by telephone and Internet. Services are available in English or Spanish. To learn more, call
866.530.9869 or visit MoneyManagement.org.

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