provided by Sarah Ashton, Broker Associate
Ashton Kirchner Group, Keller Williams Realty
This word is being used a lot these days relative to housing. With the recent run up in home prices and the jump in interest rates, the ability to afford buying a home is getting tougher. But what actually does affordability mean and what are the main factors that play into a property being affordable to folks?
Income: Your salary plus any money you receive on a regular basis. This is proof of how steady your income is and will establish a baseline of what you can afford month to month. If you are self-employed this will likely mean that you will need to produce several years of tax returns to prove that you have consistent income.
Credit Score: Your credit score and the amount of debt you owe as well as your history paying your bills on time. The higher the score, the more favorable the lending terms. Credit repair advisors can assist with “cleaning up” credit reports. It is good to get your credit report annually (freecreditreport.com) to be sure there are no bogus items that could affect your credit score.
Debt and Expenses: This is what you owe every month such as rent, car payments, other loans, groceries, utilities, etc… Retiring debt (paying it off) is always a good idea and really boosts your Credit Score.
Cash Reserves: How much do you have in the bank to make a down payment and to cover the closing costs associated with purchasing the property, including insurance? These expenses can be substantial so planning on running down all your reserves can be a big mistake. Additionally, if there are any improvements or moving expenses you anticipate having after you close on the purchase, there needs to be additional funds in the bank to make that happen!
A common rule of thumb to use when considering what you can afford is the 28% / 36% Rule. This lays out that you should not spend more than 28% of your gross monthly income on home related costs nor should you spend more than 36% of your income on all your debts – credit card, auto loans, student loans plus mortgage.
If financing your property purchase is part of the plan, it has never been more important to speak with a knowledgeable lender about your particular situation. Any offer with a financing contingency will need to be accompanied by a current pre-approval letter. This will tell the seller of the property that the likelihood of the property coming to a successful closing is more likely because you have done the work up front to ensure you can afford the property.
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