Costs and Finances
How Much House Can You Afford?
Knowing your price range brings your house hunting into focus. Since most people will borrow money to make their house purchase, it helps to look at your finances as the lenders will.
The amount of money a lender will loan for your house purchase depends primarily on how much you can afford for the monthly payment and how much you can invest in the down payment.
Monthly payments consist of the principal and interest on the mortgage loan, as well as property taxes and homeowner's insurance. These four costs are often abbreviated as PITI.
Generally, lenders figure that the buyer shouldn't pay more than 28% of gross income for PITI, or 36% for both PITI and monthly long-term debts such as car payments, credit card payments, school loan payments, child support and alimony payments.
The larger the down payment, the less you need to borrow, which means a lower monthly payment. The obvious source of money for your down payment is either your savings or the proceeds from the sale of a home you already own. But there are other sources that you may not have considered. Talk with your lender about acceptable down payment sources.
Conventional loans require a down payment as low as 5% of the purchase price of the home. You will be required to buy private mortgage insurance (PMI) with a down payment of less than 20% or in special higher risk situations. This insurance protects the lender in case of default and allows the lender to approve a larger mortgage amount than would otherwise be approved.
There are a multitude of financing options. You can go to mortgage bankers, savings and loans, or commercial banks. There are conventional mortgage, adjustable rate mortgages, balloon mortgages and assumable mortgages. Mortgages are available from the Federal Housing Administration, Veterans Administration and Iowa Finance Authority.
Your Iowa Realty agent monitors mortgage rates and programs and will provide information to help you find the right mortgage.