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Steps to Owning Your First Home... Can You Afford to Buy?

By Homesmsp @HomesMSP

Finding homes online and wondering if you can afford to buy? Here are some basic guidelines that can help you decide...

What you can afford = 3x your annual income

  • Rule of thumb for about how much you should spend on a home purchase, although this can vary greatly depending on your down payment, other debt, credit score, interest rate, etc
  • Combined income of everyone who will be on the mortgage
  • Median home sale price in the Twin Cities was $163,000 in April 2012
    • This means you should have annual income of $54,333 to buy a median priced home

Know your limits

  • Conventional financing usually requires that your total monthly bills be no more than 45-50% of your monthy income
  • Most FHA loans allow up to 55% depending on overall credit, etc
  • However, only you know what is a comfortable limit for you
  • Before automated underwriting total debt-to-income limits were usually 38% for conventional loans and 41% for FHA loans

 Money you will need up front

  • Earnest money - usually about 1-2% of purchase price, submitted with your offer and held for you to use towards your down payment at closing
  • Inspection - usually done right after coming to an agreement, budget about $400
  • Appraisal - done as part of mortgage underwriting, budget about $400
  • Insurance - first year homeowner's insurance must be in place by closing
  • Down payment - usually 3.5% - 20% of purchase price, payable in certified funds at closing
  • Closing costs and prepaids - estimate 3.5%-5.5% of purchase price, most costs related to financing and payable at closing; ask your lender for an estimate; seller can contribute if part of purchase agreement

These are only rough guidelines... the only way to really understand your situation is to talk with a mortgage lender!

Sharlene Hensrud, RE/MAX Results - Email - Minneapolis Buyer's Agent

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