Anyone that is going to buy a home has to know that they can financially afford to do this. It is not something that can be guessed about. Home buyers need to know what their home buying power is. With this knowledge, they can feel confident in knowing how much they can afford to invest in a home. It also helps them to limit their choices to those that fall into their buying power range.
What is Buying Power?
It seems like there are always new buzz words coming out in the real estate industry. Buying power is not just a fad but something very realistic. It means factoring in some very important financial figures:
- You must determine what your income for the month is
- Then know what your monthly expenses are along with ongoing bills
- How much money you have in your savings for the down payment
- How much money you are going to receive from the sale of your home
- What you can obtain through a mortgage pre-qualification.
What You Can Afford
Buying power is a little different than just basically looking at what you can afford. Many realtors will use what is called housing affordability to determine what price range of houses interested buyers should focus on. This is a metric that is based on the average buyer. Each buyer is unique, so their circumstances may not equate to the average buyer.
Looking at the Big Picture
Most often, those that are buying a home get caught up in the sale price of the home. This is their immediate concern. They need to know if they have enough for the down payment, does it fit in with the pre-approval, and will there be enough left over to cover closing costs. The future financial responsibilities of the home get put on the back burner for the moment. But this is just as important as the sale price.
The homeowner has to know that they can comfortably handle the monthly expenses that are going to come with the homeownership. This is going to be the mortgage payments plus all the other expenses that come with owning a home. This is part of buying power.
==The Buying Power Formula==
At first, it may seem a little daunting to try and calculate what the buying power is. There is a simple formula that can be used for this.
- Add up the money saved for the downpayment
- Add up what the sale of your home is bringing in for you (after closing costs and mrtg. Discharge)
- Next, Add all of your income sources
- Then Add any other money that could be applied to a monthly mortgage payment if needed
- Add in the mortgage that you are going to receive from the lender to buy your new home
Adding all of these together give a clear indication of what your buying power is. However, there are other factors to consider that are used to offset some of this buying power.
The figure arrived at for the buying power should not be assumed as what should be spent on the house purchase. There are other expenses that are going to come with home ownership. Homeowners have to have access to money for home maintenance and repairs. These can arise at any time.
Increasing Your Buying Power
While the money that has to be borrowed is included in buying power borrowing less will make the buying power stronger. This is because the mortgage payments will be less, which leave more money left over for other things.
What Can Affect the Buying Power?
There are certain factors that can influence the buying power, which are:
Debt to Income Ratio:
Those with a high debt ration are decreasing their buying power. Lenders who are looking at buying power will take the amount of debt an individual has and compare this to their income. The lower the debt ratio, the more favourable the borrower, is to the lender.
A good credit score is a powerful resource when it comes to borrowing for a mortgage. Not only does it make it easier to find a mortgage lender, but it can also allow for a lower interest rate.
Lenders include assets in buying power because it strengthens the buyer’s position for buying.
Some home buyers are tempted to start looking for a home when they have the minimum downpayment that will be required. For extra savings and to enhance the buying power having 20% or more to put down is the wisest choice. It means there will be no need for private mortgage insurance, which is an extra cost that normally gets rolled into the mortgage. Which means that interest will be paid on this too.
Focusing on the Buying Power
Having a good understanding of what buying power means home buyers can pay more attention to strengthening it before buying. The first approach to doing this is more of a long term one. Such as:
Setting a Goal for the Deposit
- Having a specific goal to work towards may help to ward off the temptation of buying with the minimum down payment.
- When a real focus input on reducing expenses, many are surprised to learn about how much money is being spent unnecessarily. Reducing expenses usually means setting a budget. However, saving to buy a home is a long term endeavour, and the budget should not be overly restrictive.
- For some that want to speed up the process of saving for a home, they may want to look for ways to make some extra income. That doesn’t mean that they should become workaholics. But finding a part-time job that only demands some of the extra time may work.
If the home saving process is too uncomfortable, it will make it much more difficult to follow through with. When this effort is done in a comfortable manner many are surprised at how fast the time passes.