Practical Home Buying Guide – A Serious Look at the Affordability Issue

Contrary to popular belief, the issue of affordability is not just the concern of first time home buyers, as even the seasoned ones can make erroneous judgments and ill-advised buying decisions and end up “eating more than they can chew.” In determining how much you can afford when in the hunt for your dream home, you must understand that the process is not entirely about the asking price of home sellers. The critical details about your financial position and affordability are something that you need to discuss thoroughly with your real estate agent before you even consider making your initial offer.Of course, you can get a general assessment of your financial position and your ideal price range with the help of online tools such as the mortgage calculator. Specifically, this online tool can give you the numbers in terms of how much you can really afford to borrow for the purchase of your dream home. However, this simplistic definition of online mortgage calculator does not provide you with the real essence why we need to use them in our home buying decisions.It is true that what it provides are logical computation of relevant figures that can directly guide us in making the right buy. In essence, this online tool chalks up the numbers that we need. However, it does not give us information why we are getting those specific numbers. In short, we need to have clear understanding of the variables that are factored in the entire computation process. We all know that 5 times 2 equals 10 – everyone knows that. What you must understand is why the online mortgage calculator is churning out those numbers.This is the main reason why we have to properly understand the detailed information that you need to have when using this online tool.The “income” used in online mortgage calculator can refer to several types of earnings depending on your overall financial condition or position and the circumstances by which those incomes are generated. Specifically, the income referred to in online mortgage calculators is your GROSS income and not your NET income. If you are a regular wage earner with a fix salary, then your present salary is the one that will be reflected in the “Income” field.On the other hand, if there is a portion of your income which is determined on an hourly basis or a bonus that is dependent on pre-established targets, then you will not be able to use your latest reported income.Except for your fix salary or other types of income that are defined as “promise to pay,” you will have to derive your “Annual Income” by getting the average of your earnings for the last two years. This figure is subject to adjustments based on subjective parameters that may be applied by the loan officer during the actual assessment of your mortgage application.If you just received a raise, say for instance from $80,000 to $90,000 annually, and the entire amount of your adjusted income is based on fixed salary, then the full amount goes into the “Annual Income” field. However, if the $90,000 annual earnings consist of fixed salary and performance or production bonus, then the FULL amount must NOT be reflected in the data field.To illustrate, let us assume that you total earnings for the year is equivalent to $65,000 fixed salary and $25,000 bonus and overtime pay. Let us also assume that your bonus and overtime pay during the preceding year is $15,000. To determine the amount that you will use to reflect this portion of your annual income you simply add the numbers and divide the sum by 2. Thus, your annual income is $65,000 fixed earnings plus $20,000 bonus and overtime pay or a total of $85,000.

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