 Personal Finance PowerPoint Presentation. Home Buying Activities Overview. Get ready to get financially fit by practicing personal finance. Remember that we can break out most finance decisions into the short term decisions and the long term decisions. Short term decisions being the ones that we're going to train our guts so we can trust our gut using tools like trial and error tinkering so that we can hone down our habits and make decisions quicker based on basically our gut over time. The long term decisions are often the areas we're going to focus more on because we're not naturally inclined as human beings as much towards those long term types of decisions where we have to follow the adage which is measure twice cut once spending more time on one particular decision not being able to depend on tinkering, trial and error simply training our habits or trusting our gut per se or as the only tool but rather putting together a formal process for the decision making process so that we can make a good decision that will have an impact for long periods into the future. For individuals then the home purchase is going to be one of the biggest type of financial decisions because it's going to have one of the longest impacts and one of the largest dollar amounts so clearly that is one that we want to put on the side of measure twice cut once try to get it right the first time because whatever happens in the future is going to have a longer term impact in the future so we can think about the process similar to our large purchase kind of processes but we've got a process just in terms of the home buying which would be one determine the home ownership needs so what are your needs for home ownership are you renting versus purchasing decisions that we've talked about in the past and now we're focusing in on the purchasing side of things as opposed to the renting side of things you also kind of just want to think about what is your idea of home ownership meaning are you purchasing the home for more of an investment purposes are you purchasing the home because that's what the like your thought process of what the American dream is you just should do it or are you purchasing the home you know more for a long term investment because you are actually going to be using the home as a home for a long period of time and you have a good idea of where that home wants to be and where you're going to put the roots down I would argue of course that that last one is the one that should carry the most weight you're saying hey I'm buying a home because I want to plant my roots here this is where I want to be this is where I want to have my family everything I need is in this area and this is where things are going to happen for me if that's the reason that's probably the strongest reason although again obviously finance just finance reasons and what not can be factors as well number two find and evaluate a property to purchase so clearly then you would be locating the properties that you would be wanting to purchase price the property so obviously as you're looking at the locations you're also comparing that to your budget and trying to determine what types of property are available to you within your ranges as you price them to obtain the financing so then we got to go through of course the financing process because most of the time we're not going to be paying straight cash for the home but need to be financing it and then we're going to close the purchase process and obviously this is a longer time stretch to get through this than with many other types of purchases are you ready to buy a house most of this information can be found at Investopedia which you can find online look up the references resources and continue your research from there if you're ready to buy a house the first question you're likely to ask is how much can I afford so clearly when we're looking to buy a house usually we have a fairly good idea of where we want the house to be that's where we want to put down the roots and we're asking the question well how much is the home in that particular area it's usually a stretch to think about for most people whether or not they can afford the house it will typically take financing something that most people don't have a lot of experience in at least not experience to that degree of financing that is going to be needed for the home purchase for most people so answering that question means taking a look at several factors before you snap up that seemingly great buy on a home learn how to analyze what affordability means so there's going to be more questions with regards to affordability than a simple kind of budgeting process typically when you're looking at the home purchase given the fact that there's going to be so many factors that are involved including just the size of the home purchase the length of the home purchase how many years it's going to have an impact into the future as well as the length and size of the financing the amount of financing that's going to be involved and the length of time into the future that that is going to take on and then of course if you get into the non-standard fixed locked down rates different types of loans that can widen the level of complexity greatly quickly so you'll need to consider various factors ranging from the debt to income the DTI ratio to mortgage rates understanding your debt to income ratio first the first and most important the first and most apparent decision point involves money so clearly do I have the money to be purchasing the home I'm going to need import financing to do so how much financing would be appropriate for me if you have sufficient means to purchase a house for cash then you certainly can afford to buy one now if you have the cash clearly this isn't a problem most people don't have the cash straight up to purchase the home and need some form of financing to do so even if you don't pay in cash most experts would agree that you can afford the purchase if you can qualify for a mortgage on a new home so clearly we would want to be financing for most people that means a mortgage if you put the mortgage in play then the question is what kind of loan am I going to be taking on how long do I want that loan period to be can I have a fixed rate or a flex rate and so on and so forth but how much mortgage can you afford the 43% debt-to-income DTI ratio standard is generally used by the Federal Housing Administration the 8th FHA as a guideline for approving mortgages so this is kind of like a heuristic a debt-to-income of the 43% so that gives you a general idea that's not like a red line in the sand that's where you want to be but that's the general place you want to be and note that when you're looking at financial institutions they're going to use their own kind of heuristics in order to see if someone should or has the ability to take up the loan noting from the finance perspective from the person that's giving the loan that they of course want to make sure that they're going to get paid back they want to give the loan but they want to make the interest on it and they might not have so much assurance on say like your actual financial statements because they might not be reviewed or anything like that and so they're going to use possibly percentages on stuff they can verify because you can get a pretty good verification of say your income for example because you can get that from the W-2s and the tax returns so this ratio determines if the borrower can make their payments each month some lenders may be more lenient or rigid depending on the real estate market and general economic conditions so clearly the economic conditions can change over time and the regulatory conditions can change over time which could fluctuate those general kind of heuristics that go into place so that means that you don't want to be completely dependent on what the bank says that you can take out as a loan you're not dependent on the bank for your financing you're not dependent on the bank for your budgeting you're going to the bank for the financing you would like from the bank to get as much ability to take out as much loan as you can and then you want to do your own budgeting to determine how much you can actually afford so a 43% DTI means all your regular debt payments plus your housing related expenses, mortgage mortgage insurance, homeowners association fees property tax, homeowners insurance, etc shouldn't equal more than 43% of your monthly gross income so when we're adding this together we're not just taking a look at the actual payments for the loan you've got the other factors that are going to be involved with the purchase of the home including the mortgage insurance if it applies homeowners association fees if they apply property taxes almost certainly will apply and homeowners insurance and that kind of stuff that will be costs that you'll have to deal with going forward even after the initial purchase for example if your monthly gross income is 4,000 you multiply this number by 0.343 43% to get 1,720 which is the total you should spend on debt payments so notice this is kind of an easy way for you to get an idea of one how much you might be able to afford and two what the bank calculations their kind of heuristics would be once you get this amount you can try to trim it down to the actual mortgage payment which will do in the practice problems and then you can actually kind of try to think about how much loan they might be able to give you based on this information because that would be the payment amount for the loan so this includes not just the loan but this other stuff if you can trim it down to the loan payment then you can use that to determine how much loan you might be able to get if you assume the number of years like 30 years and an interest rate we'll talk about in the practice problems so now let's see let's say you already have these monthly obligations minimum credit card payments of $120 a car loan payment of $240 a student loan payment of $120 a total of $480 that means theoretically you can afford up to $1,240 per month in additional debt for a mortgage and still be within the maximum DTI debt to income ratio of course less debt is always better what mortgage lenders want so what do you want mortgage lender you also need to consider the front-end debt-to-income ratio which calculates your income vis-a-vis the monthly debt and would incur from housing expenses alone such as mortgage payments and mortgage insurance usually lenders like that ratio to be no more than 28% so this is something that can change from period to period but again if you know these general heuristics these general calculations that can help you to do your estimates not just for your budgeting but also try to base on how much loan you might be able to get and what the bank is basically thinking on their end on your end I would still say you'd want to actually make an income statement and see what your monthly expenditures are and your cash flow and so on so for example if your income is $4,000 per month you would have trouble getting approval for $1,720 in monthly housing expenses even if you have no other obligations for a front-end DTI of 28% your housing costs should be under $1,120 why wouldn't you be able to use your full debt-to-income ratio if you don't have other debt because lenders don't like you living on the edge so they're going to try to put some room in there and just in case anything goes bad that's going to be a safeguard that they're going to be putting into place to safeguard against you defaulting on the loan financial misfortunes happen you lose your job your car gets totaled a medical disability prevents you from working for a while these kind of things they want to make sure on their end they're safeguarded on their side of it and you might say well they're safeguarded because my house is on the line for collateral but they don't really want to foreclose on the home no one wants to do that really they want to get paid for the loans that they can be sure to be paid on now of course as the market changes banks might take on more risky or less risky loans depending on the market conditions and so on but in any case if your mortgage is 43% of your income you'd have to wiggle room for when you want you would have no wiggle room for when you want to or have to incur additional expenses most mortgages are long term commitments keep in mind that you may be making those payments every month for the next 30 years there's a long time frame going forward and you know you want enough what they say wiggle room here enough cushion so that if there was a problem you're not just right on the edge you're just barely making the payments because it's likely that something's going to happen within the 30 years hopefully things get better hopefully your income goes up and you make the payments more easily and the house value goes up and you have more equity in the home and whatnot that's what everybody plans on but you know there's going to be some people or that didn't you know it's going to go the other way and so you want some cushion so accordingly you should evaluate the reliability of your primary source of income so this is another thing that you know the bank is going to be quite concerned oftentimes when you have like a business income like a sole proprietorship for example because it doesn't feel as steady especially if it's a newer type of business then if you had like an established W-2 income a job that you've been at for the last 10 years or something like that you've got if you're locked in and you've got a standard increase we know exactly what the increase in your income is going to be and so on and so forth that to a lender is going to look a lot more you're going to feel a lot better about it than oftentimes the business income which looks a little bit more like it could fluctuate so you should also consider your prospects for the future and the likelihood that your expenses will rise over time everybody's expenses are going to rise over this time we've got some inflation going on but in any case can you afford the down payment it's best to put down 20% of your home price to avoid paying private mortgage insurance PMI so the standard down payment is usually 20% so if you keep to the standards then it's usually easier it's kind of like you might compare it to say if you're buying a car and you're buying a new car versus kind of a used car the new car is kind of easier to buy oftentimes because it's the standard you know what they bought it for you know what the new cars are kind of going for and so on if you stick to the standard kind of financing practices it usually is the easier way to go there too because from financial institution to financial institution you're comparing apples to apples the same thing to the same thing so they're usually fairly similar over there so what you would like to do is say I've got solid credit I'm going to put 20% down I've got a reasonable loan I'm going to put it over the 30 year time frame and then the rates will be you could be fairly you could shop around for the rates with some assurance that they are the appropriate market rates for that given time once we start changing things tinkering things go down to 10% on the down payment or we start to say I want a lower interest rate by making it variable or we change possibly not the length of the loan isn't too bad if you go from a standard 30 to like a 15 that's still fairly standard but if you go to a weird kind of payment schedule then that makes things you got to be more diligent in checking everything out obviously when you put 20% down that is good for the bank because the bank wants to be able to say even if the house goes down in value if you stop paying for it they could foreclose on it and they could still recover the home value even though the home value has gone down because you pay down 20% it also shows that you have committed by putting down 20% you're less likely to just walk away from the home in that case and therefore you know that's why they want that down payment so usually added into your mortgage payment the PMI can add $30 to $70 to your monthly mortgage payment for every 100,000 borrowed so if you have to get the mortgage insurance the private mortgage insurance then of course that's going to be another increase and that's going to give security to the lender given the fact that you don't have that they don't feel that security from the down payment so they want the security in the form of insurance so there may be some reasons that you might not want to put down 20% towards your purchase nobody wants to but that's what you got that's what you have to do otherwise it's worse oftentimes so perhaps you aren't planning on living in the home very long term plans to convert the home into an investment property or you don't want to risk putting that much cash down if that's the case buying a home is still possible without 20% down you can buy a home with as little as 3.5% down with an FHA loan for example but there are bonuses to coming up with more so you know again you could of course put less down obviously the lender is going to be skeptical if you put less down for the most part because these types of reasons well you don't want to put much cash down you don't want to be tied down to the risk you might want to change the property and these are obviously bad things the lender wants to hear that you're going to be buying the house for the 30 years so they're going to take on more risk and usually that would involve other kind of costs that could come into play now if you bring in the FHA again you might have different kind of complications involved with regards to that we might talk more about that in future presentations so in addition to the aforementioned avoidance of PMI a larger down payment also means smaller mortgage payments for a 200,000 mortgage with a 4% fixed rate fixed interest rate for a 30 year term you would pay $955 if your mortgage were $180,000 with a 4% interest rate for a 30 year term you'd pay $899 and $59 so clearly if you put more money down upfront that means you're going to have a smaller loan in this case we're talking a $200,000 loan versus a $180,000 loan even if you got the same rate with the two loans then of course if you have a higher loan you're paying more interest on it you're going to be making more payments in general you're going to be paying more interest over the term of the loan you might think well why doesn't the bank like that you would think that the bank might want to give me a $200,000 loan instead of $180,000 loan because I would be paying them more interest over time which is true and they would like that if they could guarantee that you are going to pay them the more interest over time the problem is that if you got a $200,000 loan on a $200,000 home you're not invested in the home you could walk away from the home and not feel like you lost anything because you didn't really put any money on it if something went down went bad on it whereas if you put 20% down if you put 20,000 down on that home you're invested in the home and the home could go down in value under 200 what if the market went down then now you're going to have a loan that's higher in the value of the home and your likelihood of walking away from it is higher and if you did walk away from it the lender wouldn't be able to sell the home for enough to pay off the loan and they'd have to deal with the selling costs and what not so there's risk involved with that so if they could guarantee that you are going to pay them the $200,000 then yeah they would make more interest but the risk involved in it makes it not worthwhile when you play it out and there's choices among lenders some lenders won't offer a mortgage unless you put at least 5% to 10% down being able to afford a new house today is not nearly as impossible as your ability to afford it over the long haul the housing market assuming you have your money situated under control your next consideration is housing market economics so the economics of the housing market quite complex clearly it's kind of intertwined with so many other things because the government puts in policies that influence the housing markets which might be based in part on lobbyists so clearly we could see that in the tax code with the interest being deductible in property taxes and this kind of stuff that complicates the calculations for buying a home it also complicates the housing markets the rises and falls in the housing markets if you look at them over time you're like in a sense but obviously there's a lot of incentives going on including like Fannie Mae and Freddie Mac and different incentive programs on housing purchasing and tax breaks and what not so that all that stuff kind of complicates the housing market even more than it already would be complicated so either in your current locale or the one you're planned to move so clearly the housing market also you can think about it from a national standpoint but then you want to narrow down to the local standpoint what's the housing market where you stand and those two things are not always in alignment the overall housing market in the country has a general influence possibly on the whole country but the housing market for a particular place is going to be unique to that particular place so a house in this is an expensive investment having the money to make the purchase is excellent but it doesn't answer whether or not the purchase makes sense from a financial perspective so if you can afford the home in some way shape or form house or finance or money or finance cash or finance the question is still is it a worthwhile decision I think that decision is a lot more easy if you're saying I have the money to do it and or I have the ability to finance and this home is exactly where I want to be I want to put my roots down here I want to be here this is what I plan on doing then you know if you're going to own the home for the 30 year time friend even if the home value fluctuates and it goes up and down as long as you can make the payments you feel you're good you feel pretty good about at least from a cash flow standpoint even if the housing market went down it wouldn't really devastate you because it's not going to hurt your cash flow the more and more that your home is being purchased just simply for kind of like an investment standpoint and you're going to feel the pain every time the house market fluctuates up and down because you're planning on moving soon or you want to flip it or you want to sell it then of course that more and more the housing market comes into play and this becomes more significant of a decision factor so one way to do this is to answer the question is it cheaper to rent than buy if buying works out to be less expensive than renting that's a strong argument in favor of purchasing so obviously if you compare the renting process through to the purchasing process then you might just see from a financial perspective you're like over the over my timeframe purchasing is cheaper that would be an indication that the purchase at least from a financial perspective would be a good place to go if you are comfortable with being in that place for a long period of time if you if that's the thought process so similarly it's worth thinking about the longer term implications of a home purchase for generations buying a home was almost a guaranteed way to make money so in prior generations buying a home was like the one of the biggest investments that you can have because property was just going up all the time and it was kind of you get to the point where these housing cycles go up for a long period of time and people start to think that they can never go down but clearly they do go down at some point it's just a very long cycle of increasing and decreasing in the in the housing markets so it may not be the same you know whatever you grew up with the housing market that you happen to grow up with might not it might not be how it currently is you gotta see it what it what's it like right now so your grandparents could have bought a home 50 years ago for $20,000 and sold it for five or ten times that amount 30 years later while real estate has traditionally been considered a safe long-term investment recessions and other disasters can test that theory and make would-be homeowners think twice so that shouldn't really I don't think that should scare people away from the home ownership if you're buying the home in order to use the home if you're buying the home to live there for 30 years and you know raise a family there and everything you got everything you need around there then the fluctuation in the house prices like it's amazing if that the house prices goes up 10 I mean I've seen this this is my experience in the where where I where I lived with my parents generation but it didn't really have a whole lot of impact on on them at least during the years that we were growing up because they weren't selling the home they were just paying down the payment and as long as you can pay down the payment your cash flows the same it has a huge impact at retirement because there's they could they could sell the home and move somewhere else if they want and it went up hugely but if if you're buying the home to live in it and the home didn't go up by you know 10 times or whatever but you you got good use out of it for 30 years and you're able to make the payments then you know it served its purpose in that case you would think you might you might make the argument so during the great recession many homeowners lost money when the real estate market crashed back in 2007 and ended up owing homes that were worth for less than the price at which they were purchased for many years after so this is the the housing recession not the great depression I hope I didn't say the great recession and this is was the the housing bubble broke and again you can get into a lot of details in terms of it's really interesting why why did this housing bubble kind of happen it's really an interesting kind of thing to get into but there's a lot of factors that are going to be involved in it including secondary markets government government kind of influence Fannie May and Freddie Mac influencing it and you can see these changes in the financing terms as a result that seem weird like why would that happen because of all these other influence that are happening like putting no money down and having low interest rates and what and what not and so so that's an interesting topic to look at but just that means that the housing markets can go up and create quite a bubble and then and then go back down we've seen that in other economies as well so whenever the housing market seems way overpriced you would think that it might be at least some term but you never know when it will turn around so so if you are buying the property on the belief that it will rise in value over time be sure to factor the cost of interest payments and your mortgage upgrades to the property and ongoing or routine maintenance into your calculation so you're still going to have monthly costs that are quite significant with maintenance and so on when you're living in the home even after you purchased it the economic outlook along those same lines there are years when real estate prices are depressed and years when they are abnormally high if prices are so low that it is obvious you are getting a good deal you can take that as a sign that it might be a good time to make your purchase in a buyer's market depressed prices increase the odds that time will work in your favor and cause your home to appreciate down the road for example if history repeats itself we may see drop in home prices due to the COVID-19 pandemic and its dramatic impact on the economy so I won't try to completely speculate the economy here you can look into a lot of other factors on that but clearly we have a situation here with the whole COVID situation that's having the economic impacts that it's having and that's going to cause weird distortions all over the economy including in the housing we also see that at this current point in time it looks like because of all the spending and all the other kind of stuff like supply chain issues and whatnot that they're having an inflation issue which means the purchasing power of the dollar is going down that's part of the reason that the prior generations home values went up so much is because they were going through an inflationary period like in the 70s we had an inflationary period and the home relative to the dollar if you own the home relative to the dollar you could end up in a beneficial situation there but everybody in my generation is thinking that at this point in time given their prior generation so given that you're not sure that that's exactly how things will play out but you would think if obviously there's an inflationary time period and you had the home and you locked down the rate in the home that the home might retain its value in alignment or compared to the rise in the dollar which would be beneficial over time but again that's going to cause weird implications in the market because a lot of people are going to be thinking that you would think so interest rates interest rates which play a prominent role in determining the size of a monthly mortgage payment also have years when they are high and years when they are low which is better so notice that so we're probably going from low epic low rates for a long time to rates that are going to increase many people are projecting that they're going to increase for a good time into the future the idea that there was terms at the time of the recording this they were saying it's transitory it's transitory for like but it's not meaning it's going to terminate some but it doesn't the more and more doesn't look like that so we'll see if the interest rates get out of control or if they're able to tamp them down it'll be an interesting little epic we have here so for example a 30 year mortgage interest rate will cost you 460 months on 100,000 loan at 3% interest will cost you 422 per month at a 5% interest rate it will cost you 537 per month at 7% it jumps to 665 so imagine a situation and this is what kind of happened in my parents generation if you got the loan and you locked the rate down at like a lower rate like at the 3% in this case and then 5 is that 7% all of a sudden your loan looks a lot better because you locked it down at the 3% and now people are getting financing that's way over that point in time for the last a long time like 10 years you know the rates have been kind of like going down so people have been refinancing refinancing they started at higher rates and then refinancing down to the lower rates it looks like we're in an inflationary period and that means that if you locked down the lower rate then later on the rates are going to go up people that are getting loans later up are going to have to pay higher rates so if interest rates are falling it may be wise to wait before you buy if they are rising it makes sense to make your purchase sooner rather than later so there's a lot of interesting kind of components to that rate increase and decreasing because you also have to take into consideration how much cash can you pay right I mean because there's also going to be investments to the home prices depending on the rates as well which will have an implication if you could pay the actual cash for it then of course you might want to pay the cash when the value of the home is lower to be making the purchase time of year the seasons of the year can also factor into the decision making process spring is probably the best time to shop if you want the widest possible variety of homes to choose from the rates to the target audience of most homes families who are waiting to move until their kids finish the current school year but want to get settled before the new year starts in the fall if you want sellers who may be seeing less traffic so you got less traffic involved which could make them more flexible on price winter may be better for house hunting especially in cold climates or the height of summer for tropical states in other words the off season is what we're talking about here there are a lot of stories are likely to be smaller so choices may be limited but it is also unlikely that sellers will be seeing multiple offers during this time of year so if you're on the off season there might not be as much out there but the ones that are out there might have less traffic and offers related to them making the process a little bit easier possibly in some cases depending on what you're looking for however it is worth noting that some savvy buyers also like to make offers around days such as Christmas or Easter hoping that the unusual timing lack of competition and overall spirit of the season will get a quick deal done at a reasonable price consider your lifestyle needs while money is an important consideration many other factors could play a role in your timing is your need for extra space imminent a new baby on the way an elderly relative who can't live alone so you might have other needs of course that will increase your timing needs and you got to do what you got to do within that timing framework that of course could impact your decision making process so does the move involve your kids changing schools if you'll be selling a house in which you've lived for less than two years would you incur capital gains tax so if you're selling your home the taxation of it can be important if you don't get that huge exclusion and if so it is worth waiting to avoid that fight so you may love the cook with the gourmet ingredients take a weekend gateway every month patronize your performing arts or work out with a personal trainer none of these habits are budget budget killers but you might have to do without them if you bought a home based on a 43% debt to income ratio before you practice making mortgage payments give yourself a little financial elbow room by subtracting the cost of your most expensive hobby or activity from the payment you calculate so notice that we're using when you're using this 40% again I would use that 43% I would try to use it as a heuristic for the banking side of things and then do your own budgeting on your side of things try to actually factor in what your income costs are and then determine how much more cost you're going to have for the home and see if you're living within that budget if you're not then don't expect that you can just you know change your habits like overnight because you can't their habits they're going to take a while to change so if there's going to be a significant change in your lifestyle then you got to take that into consideration you can probably want to start implementing that before the purchase so that you know what that change feels like so if the balance isn't enough to buy the home of your dreams you may have to cut back or start thinking of a less expensive house as your dream home selling one home buying another if you are selling a home and plan to buy another save the proceeds from your current home in a savings account and determine whether or not after factoring in other necessary expenses like a car payment or health insurance you will be able to afford the mortgage it is also important to remember that additional funds will be allocated for maintenance and utility so whenever you make the purchase don't just factor in the mortgage payments you're going to have those other costs that you'll have to be putting up each month for the house those costs will be undoubtedly be higher for larger homes so if you're going from a smaller rental place to a larger home then you got to budget in the fact that you're going to have these costs for just simply the utilities and then the maintenance which might not be something that you're factoring in on a rental for example when you calculate use your current money you don't assume you'll be making more money down the road so often times we go into a new home and we say yeah I could barely do it right now but I'm going to make more money in the next five years I'm planning on a substantial increase in my work and my prestige and what not and that's hopefully that happens but you'd like to kind of budget for a worst case scenario too or at least take that into your risk analysis that things can go the other way and you want to make sure that is the case that you at least have some cushion that you would be you could go forward with that. Races don't always happen and careers change if you base the amount of home you buy on future income you might as well set up a romantic dinner with your credit card as you'll end up in a long lasting relationship with them it's okay however if you can handle these extra house costs without extra credit card debt you can afford to buy a home as long as you have saved up enough money for your down payment so did you plan to save affordability should be the number one thing you look for in a home but it's also best to know how long you want to live there if not you could get stuck in a home you can't afford in a city or town you're ready to leave so clearly when you're purchasing the home you want to think about how long you're going to be in the home that could be a little bit different than the loan terms you might be taking a 30 year loan to finance the home but actually still be thinking you're going to sell it in 5 years or something like that so you want to take a look at how long you're going to be there many financial experts suggest living in a home for 5 years before selling it as a guideline don't forget to factor in the cost involved with buying selling and moving so clearly the cost of moving from house to house will be more than just you know the sales price you got to consider all the factors that are going to be involved in that also consider the break even point for the mortgage fees associated with the home you are selling if you can't decide what city or town you'll live in and what your 5 year plan is it may not be the right time to buy a home if you want to buy a home without a 5 year plan purchase one price much lower than the maximum you can afford you'll have to be able to afford to take a hit if you have to sell it quickly another exception if you work for a company that buys relocated employees houses one name for this is a guaranteed buy out option so how much house can I afford so how much can you get for the house we will do some calculations on this some practice calculations to get an idea how you might go about that in our practice problems you should examine your income savings for a down payment and closing costs and reoccurring debt to figure out how much house you can afford to buy the 43% debt to income ratio stand is a good guideline for being approved and being able to afford a mortgage loan so again you can use that 43% that's like the heuristic that a financial institution such as a bank might use but again you probably that's not really where you want to stop most likely you want to look at your actual your actual spending habits because that 43% is is basically their heuristic that they're applying to everybody you might be a person that has has their spending habits or lower spending habits than that that you're comfortable with and you get a much better idea of that if you actually you know budget out what you're currently spending which in what you expect the costs to be and just do like a monthly income statement for example how does buying a house work buying a house is often among the most significant purchases in a lifetime when you find a house you want to buy you should first figure out if you can afford it then ask your lender for a pre-approved letter which means the lender believes you are likely qualified for a mortgage loan and then you can make an offer if the seller accepts your offer you will need to take several next steps including paying a down payment and having your mortgage loan approved by an underwriter and lender what is the 28 38 rule the term 28-38 rule is a guideline used by underwriters and lenders used to see if you can afford the home you want to buy in general this rule is considered one of the best ways to calculate the amount of mortgage payment debt you can afford based on your income so once again this is kind of a heuristic by the financial institutions to see if they can afford the loan many learned loan many lenders require that potential home buyers maximum household expense to income ratio is 28% with a maximum total debt to income ratio of 36% in order to be approved for a mortgage the bottom line you you are ready to buy are you ready to buy a home in short yes if you can afford to do it but afford isn't a simple as what's in your bank account right now a host of other financial and lifestyle considerations should figure into your calculations when you factor in all these elements if you can afford to do it it starts looking more complicated than it first appears to be but considering financial factors before you purchase can prevent costly mistakes in financial problems later so again it's one of those items long term purchase affecting multiple periods into the future adage major twice cut once on that one