Monday, June 26, 2006

Math we can all understand

My open house was a little slow this weekend, which meant I caught up on a bit of reading and figurin'. Figurin' is my little ways to figure out simple housing and real estate math.

For instance, how much house should you buy? Mortgage lenders usually base your approved loan amount on a borrower's monthly housing expenses/income ratio. There are many other loan products and qualifying benchmarks, but the below definition is for conventional loans that meet the federal/private relationship of Fannie Mae and Freddy Mac guidelines.

I paraphrase here from the Modern Real Estate Practice in Illinois, 5th Edition text: To qualify for a conventional loan under Fannie Mae guidelines (the Fed's arm for purchasing loans and re-selling them), the borrower's monthly housing expenses, including Priciple, Interest, Tax, Insurance and Assesment if applicable, must not exceed 28 Percent of total GROSS income. Also, the borrower's total monthly obligations, including housing costs and other monthly payments, must not exceed 36 percent of his or her total monthly gross income (33 percent in the case of 95 percent Loan to Value loans... and I know in Chicago, many of us will have a 95 percent LTV loan).

This amount is how much you will be approved for. However, this may stretch your budget. I just learned about another rule of thumb for determining your budget when starting your house hunt.

Take your total household gross income and multiply it by 2.5 and 3.5, then, find a number you can live with in between. It is similar to the lender's method of debt ratio, but this does not take into consdieration the rest of your monthly debt. But it's a start. In Chicago, you will probably push the multiplier average a little.

For example, if your total yearly gross income between you and your husband, wife, partner... whatever... is 120K, then you would do the following.

120 x 2.5 = 300,000
120 x 3.5 = 420,000

300,000 + 420,000 = 720,000/2 = 360,000

So, you're house hunting budget could be around $360,000... give or take depending on the rest of you're financial picture.

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