SET REALISTIC PRICE GUIDELINES
The easiest way to decide how much house you can afford is to determine what size mortgage payment will fit into your monthly budget.
As a general rule, your monthly housing cost should not exceed 25% to 30% of your gross monthly income if you want to qualify for a conventional mortgage. Monthly housing costs include your mortgage principal payment, interest payment, property taxes and home insurance.
To determine your possible mortgage costs, use a mortgage calculator like the one found on the website of the CPA profession’s 360 Degrees of Financial Literacy program at www.360financialliteracy.org. (Also see: Calculating the Costs of Your First Home )
Fill in the expected mortgage amount, the interest rate and the mortgage term. When you see the monthly outlays based on different mortgage sizes and interest rates, you can determine a fairly specific range for your home price and loan rate. Once you set this range, stick to it during your house hunting so that you don’t end up spending more than you can handle.
DON’T FORGET THE EXTRAS
When you are evaluating what monthly mortgage payment you can afford, remember the other expenses you’ll be paying each month and as you move into a new home. Utilities bills, for example, may increase if you’re moving into a larger space or if they have been previously included in your rent.
You may also need to pay for items such as moving expenses, new furniture, home appliances and improvements. Make a list of all your possible one-time and ongoing expenses so you have an accurate picture of how home ownership will change your financial situation.
REVIEW YOUR CREDIT SITUATION
When you apply for a mortgage, the lender will examine your financial information to determine whether you qualify for the loan. If you have a great deal of outstanding debt or if you have missed car loan or credit card payments in the past, that could hurt your chances to get a mortgage.
Before starting your home search, evaluate your current credit situation and your credit history. You have the right to receive a free credit report from each of the three credit bureaus each year.
If you find any problems with your credit history or credit score, you can take steps to repair your record before you apply for a mortgage. You can also notify the credit bureau about any errors that you find and ask to have them corrected.
REMEMBER THE TAX ADVANTAGES
You are allowed to deduct the interest you pay on up to $1 million of debt used to buy, construct or improve your principal residence or second home ($500,000 if married filing separately) that’s a tremendous advantage to homeownership that you will reap benefits from right away. In addition, you can also deduct the real estate taxes you pay on your home. Also consider timing of your home purchase.
Homes purchased late in the year can yield no tax deductions because you are better off taking the standard deduction instead of itemizing. By pushing the closing from December 31 to January 1, you could potentially obtain several thousand dollars of additional tax savings.
Need ideas on determining how much house you can afford or on selecting the best mortgage? Your local CPA can provide you with the advice you need to make the best decisions. Turn to him or her with any questions on home purchases or other financial decisions.
Copyright, American Institute of Certified Public Accountants