I am trying to figure out how much money I can spend. Can you recommend a good website or calculator? Before I meet a real estate agent or mortgage lender, I like to have a good idea of how the numbers work.
I love your column and I recently read Ellis’ book, “100 Questions Every First Time Home Buyer Should Ask.” Although I am not a first timer it was very useful and interesting. thank you.
A: Thanks for the kind words about Ellis’ book. In it, she guides readers through a formula to help calculate how much money you can afford to buy a home.
But let’s look at the numbers here, because many home buyers are in the same position as you. According to Redfin, homebuyers everywhere need a high income to qualify for a mortgage. That’s especially true in the Sun Belt, where homebuyers in Tampa, Phoenix and Las Vegas need 40 percent more income than last year to afford a typical mortgage payment.
This is a problem for seniors looking for a solar pension but living on limited or limited incomes. Whether you want to add more space to your pension or move closer to family or friends, affordability is always an issue. Considering how quickly home prices have risen over the past five years, many readers may think that prices are completely out of sync.
More issues: Seniors want to move on but are ‘stuck’ in a home after they don’t qualify for a new mortgage.
Let’s make some guesses as to what you can spend. Since you already own a home, we assume you have at least some equity in your town. That will help make your next purchase more affordable. Also, as a retiree, we assume you are on a fixed income. Whatever you spend, make sure it’s reasonable given your current financial situation.
First of all, how much income do you have? As a retiree, you probably have Social Security income. Do you have a pension? Any annuity or investment income? Do you have a part-time or full-time job that you plan to keep? Do you have anyone in your family who contributes any regular income?
Next, what kind of debt are you currently carrying? Do you have mortgage or credit card debt? Do you have student loan debt (for yourself or your children or grandchildren)?
What are your ongoing expenses? What kinds of health care expenses do you regularly pay outside of your Medicare check? What about food, utilities, WiFi, cable, transportation, travel or entertainment?
Once you have a good handle on your income, debt, and expenses, you’ve got the essential parts of your budget figured out. Now you need to know what your credit score is because it will drive the interest rate on your loan.
If you can buy a new property without a mortgage, you will be financially stronger. If you want a mortgage, you must qualify just like any other buyer. A lender allows you to spend up to 36 percent of your gross monthly income toward your total debt. So, if you receive $60,000 in annual income (including Social Security and part-time work), that’s $5,000 per month. You should be able to set aside 36 percent of $5,000 or $1,800 for your mortgage, real estate taxes and insurance, and any other debt you carry.
Remember, just because a lender allows you to spend $1,800 a month on your total debt doesn’t mean you need to. This number, along with other expenses going forward, may be too much to bear comfortably.
The problem is, starting in early 2021, because home prices have risen and interest rates have doubled, $1,800 a month won’t even go as far as it did five years ago.
Additional considerations: What to consider when retiring and renovating your home
All internet search engines provide links to mortgage calculators that you can try. For example, if you put “Mortgage Calculator” into Chrome, it will provide you with nearly 2 million links and its own, along with “Monthly Payment” or “Buy Budget” tabs.
The Chrome calculator we tested gave this result: A $300,000, 30-year loan at 5.75 percent would cost $1,802 monthly, including taxes and fees of $400. The calculator allows you to add your state and credit score range to give you a more accurate cost estimate.
You should try several online calculators. Understand that these calculators are optimized with backlinks to mortgage companies and designed to monetize websites or browsers. That doesn’t mean you won’t get a good or fair deal. But you have to be careful and shop around.
Be sure to contact a variety of lenders (including national banks, local banks, credit unions, online lenders, and mortgage brokers) to get a better understanding of what they can offer and what types of loans they allow. Based on your income and credit history. If you need a referral, talk to your real estate agent or attorney.
Ellis Glink is the author of “100 questions every first time home buyer should ask” (Fourth Edition). She is also the CEO of Best Money Moves, an app that employers offer to employees to measure and reduce financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Find them through their website, bestmoneymovs.com.
©2022 Ellis R. Glink and Samuel J. Tamkin Distributed by Tribune Content Agency, LLC.