October 22nd, 2014 8:31 AM by Jackie A. Graves, President
When you’re planning to buy a home—whether as
home buyer or as a seasoned pro—deciding how much you can afford is a critical
initial step. Once you know that, you’ll be able to find a mortgage tailored to fit your style.
But figuring it out takes more than knowing
your debt-to-income ratio. Real estate is an investment, and you need to know
your risk tolerance when investing.
Are you conservative, aggressive or somewhere
in the middle? Here’s how to tell your real estate risk tolerance.
Start by taking a look at your income level.
If you make a higher income, you can afford
to be an aggressive borrower, with up to 41% of your monthly take-home pay
going toward your debts and 36% going toward housing expenses.
If your income falls in the middle to lower
range for your area, an aggressive plan may not work for you.
“Let’s use 41% debt ratio as a
benchmark,” says Casey Fleming, mortgage adviser and author of “The Loan
Guide: How to Get the Best Possible Mortgage.”
“If you make $60,000 per year, that’s $5,000
per month. A 41% debt ratio means that $2,050 is committed to monthly
debts—before groceries, taxes, health insurance, utilities, beer, etc. Most
folks will eventually get into trouble if they do this.”
How you make your income also factors into
“If you have a steady base plus windfall
income from bonuses, commissions or stock options, then the windfall income
could be used as your ‘rainy day’ bucket, and pushing your debt ratio to 41%
makes sense,” Fleming says.
On the other hand, if your work is steady—but
you don’t see a promotion or raise in your future—a moderate financial plan
would suit you better.
And if you’re self-employed, a conservative approach is best.
“If someone is self-employed or on 100%
commission, unless they have a superb, steady track record, I would never want
to see them push the envelope,” she adds.
Before you apply for a mortgage, take a hard
look at how much you have—or haven’t—socked away.
“If someone is a good saver, I’m more
comfortable with them pushing the debt-ratio envelope, because I know they can
manage tight months,” Fleming says. “This is especially true if they will have
good reserves after close of escrow.”
If you don’t have large cash reserves in your
savings account, you’ll save yourself trouble later on by choosing a
Your age is also an important deciding
If you’re younger, purchasing your first
home, have many years of work ahead of you and feel like you’re in line for pay
increases and promotions as you go on, choosing an aggressive plan may make
sense. You’ll put more toward your debts and mortgage payments each month—but
you’ll be able to build up equity faster.
However, if you’re nearing retirement or
already retired, this strategy may not work.
“If you’re looking at retirement, you
shouldn’t be using your current income to calculate your debt ratios—you should
be using your projected retirement income,” Fleming says.
This lower, more stagnant income might be
better suited to a conservative financial approach.
Bringing It All Together
Once you know what type of borrower you are,
realtor.com®’s Home Affordability Calculator can help you see what your mortgage and
monthly expenses may look like.
By plugging some basic financial information
into the calculator and selecting your borrowing type, you’ll be able to see an
estimated monthly payment breakdown—including principle and interest
payments, property tax, home insurance and mortgage insurance.
Use this tool to help you manage your
real estate risk tolerance.
By: Angela Colley | To view the original
article click here