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Financial Help

CAN I REALLY AFFORD THIS CONDO FOR SALE IN WASHINGTON DC?

Many people entering the housing market have misconceptions or no conception of the house they can actually afford to buy. To get a good idea of the loan you’ll qualify for you need to know two things for starters. First, your (and your spouse’s) monthly income before deductions.

NOW FIGURE YOUR “DEBT RATIO”.

Simply multiply the monthly income figure you arrived at by 36%. So if your monthly income is $10,000, the amount you’ll figure with is $3,600.

TAKE ACCOUNT OF YOUR CURRENT INDEBTEDNESS.

The second thing you have to do is add up your current monthly financial debt obligations—personal loans, credit card payments, car loan payments, alimony, child support. Include any regular payment you will incur for more than ten months.

NOW DETERMINE THE MORTGAGE PAYMENT YOU COULD QUALIFY FOR.

Subtract your total monthly credit payments from your gross monthly income (combined, if applicable) . That gives you the figure a mortgage lender may use to calculate the amount you can borrow for your home purchase, assuming you make a 10% down payment.

For example:

Say you had monthly credit obligations of $1,500. Your debt ratio figure came to $3,600. Subtract the $1,500 from $3,600 and you get $2,100. Now subtract an approximated figure for property taxes and insurance: let’s use $200. To a lender, the monthly mortgage payment you could afford would be $1,900.

Remember, some factors are fluid. Of course, your down payment will affect the amount you borrow and the current interest rates will affect how much your mortgage payment will be. The chart below provides a good idea of monthly payments for various 30 year loans at a variety of interest rates. Remember that this chart shows combined principal and interest payments only. Your monthly payment is likely to include property taxes and insurance as well.

YOU CAN MAKE AN EDUCATED GUESS AT YOUR REAL ESTATE TAXES.

Naturally, tax assessments vary according to jurisdiction where the home you purchase is located. In the District of Columbia, Homesteaders—residents who actually live in the house they purchase—pay property tax at the rate of ____% per $1000 of assessed home value. So taxes on a $350,000 house would be approximately $_________ annually. Taxes on a $500,000 house would be $_________. Taxes on a $700,000 house would be _________. Currently, the District is scheduled to reassess house values every 2 years. At the time you buy, the District may be valuing the property at a lower—or very infrequently, higher—assessment than you actually paid for the home. Eventually, however, you should plan for the tax assessment to equal or exceed your purchase price. While the actual principal and interest portions of your mortgage should not vary over the course of a fixed rate loan, taxes and insurance premiums will parallel its changing value.

ESTIMATING INSURANCE COSTS IS A BIT TOUGHER.

Though insurance will be the least costly element of your total payment, the many variables which can affect it make pinpointing costs difficult. Security systems, number of fireplaces, building material, house value, dog ownership…these and numerous other factors can go into plotting insurance costs. We suggest you go on-line and complete a couple of dummy homeowner insurance applications to get a more accurate estimate for coverage cost.

DIFFERENT LENDERS MAY USE DIFFERENT FORMULAS.

We’ve tried to give you an idea here of a typical technique lenders use to establish your loan qualifications. Not all institutions go about qualifying candidates the same way, so you may be able to acquire a loan for a greater amount, or a little less, than this process indicates. Please, simply use this as a guideline.