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Calculating the Costs Needed for Your First Home

mortgage feesIf you're a first time homebuyer, you are probably eager to figure out exactly how much home you can afford.  When you are pre-approved, you will receive a general idea of that monetary range from your lender, but it's always a good idea to do some calculations on your own to make sure you aren't exceeding your financial limits.  Here's everything you need to take into consideration:

Home Affordability

In general, your new home shouldn't cost any more than three times more than your gross annual income.  Even though this is the general rule of thumb, you need to make sure that you can actually afford a home by taking into account all of your current monthly expenses.  When you subtract your current monthly expenses from your income, that amount needs to be more than what you would owe for a monthly mortgage payment.

Another factor that you need to take into mind is your Debt-to-Income Ratio (DTI), which is just your recurring monthly debt divided by your gross monthly income.  It's best if you can keep your DTI Ratio under 33% for maximum affordability.

Assess Your Down Payment

Now, if you put down less than 20% on a home, you will have to pay Private Mortgage Insurance (PMI) for the lifetime of the loan. This will amount to several thousand dollars over the lifetime of the loan.  This is just one more factor you will have to consider when deciding how much you can afford!

Be Wary of Fees

Heads up: you will have to pay fees on your brand new home.  These fees will range from closing costs to home estimate fees. When you're sitting down with your lender, ask him or her to provide a Good Faith Estimate (GFE) so you will have a rough idea of all the fees for which you will be responsible. 

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