Home Buyers: What You Can Afford? – Q & A

Are you considering buying a home in Texas? It’s an exciting decision – and one that comes with a lot of important questions. Here, we answer some of the most common questions about what you can expect when affording a home in the Lone Star State.

What Is the Average Cost of Buying a Home in Texas?

The average cost of buying a home in Texas is $257,628, according to Realtor.com. That being said, numerous variables influence the cost of the home, including location, size, and features. For example, homes in more urban areas tend to be more expensive than those in rural areas. The size of the property and its amenities will also factor into the overall cost.

How Much Should I Expect to Spend on Closing Costs?

Closing costs typically range from 1-2% of your loan amount. This can add anywhere from $2000-$4000 for a typical purchase. These costs may include title insurance, legal fees, appraisal fees, inspection fees, and other miscellaneous costs associated with the home purchase.

How Can I Determine How Much House I Can Afford?

When determining what kind of house you can afford, lenders recommend sticking to no more than 28% of your gross monthly income for housing expenses. Of course, other factors can contribute to this number, such as credit score and debt-to-income ratio. Ultimately, working with a financial advisor and lender will help you understand your options and determine what type of mortgage you qualify for.

What Other Costs Should I Consider When Buying a Home in Texas?

In addition to the closing costs discussed above, you should also account for taxes, insurance, and potential homeowner association (HOA) fees. Property taxes in Texas vary by county and can impact the total cost of ownership. Homeowners insurance and HOA dues must also be factored into your monthly expenses.

How do you find out the value of a troubled property?

Buyers considering a foreclosure property should obtain as much information as possible from the lender about the range of bids sought.

It also is important to examine the property. If you cannot get into a foreclosure property, check with surrounding neighbors about the property’s condition.

It also is possible to do your own cost comparison by researching comparable properties recorded at local county recorders and assessor’s offices or through Internet sites specializing in property records.

Why buy a house?

Here are some frequently cited reasons for buying a house:

  • You need a tax break. The mortgage interest deduction can make home ownership very appealing.
  • You are not counting on price appreciation in the short term.
  • You can afford the monthly payments.
  • You plan to stay in the house long enough for the appreciation to cover your transaction costs. Buying and selling a home include real estate commissions, lender fees and closing costs that can amount to more than 10 percent of the sales price.
  • You prefer to be an owner rather than a renter.
  • You can handle maintenance expenses and headaches.
  • You are not greatly concerned by dips in home values.

What can I afford?

Knowing what you can afford is the first rule of home buying, which depends on how much income and debt you have. Lenders generally don’t want borrowers to spend more than 28 percent of their monthly gross income on a mortgage payment or more than 36 percent on debts.

It pays to check with several lenders before searching for a home. Most will be happy to roughly calculate what you can afford and prequalify you for a loan.

The price you can afford to pay for a home will depend on six factors:

  1. gross income
  2. the amount of cash you have available for the down payment, closing costs, and cash reserves required by the lender
  3. your outstanding debts
  4. your credit history
  5. the type of mortgage you select
  6. current interest rates

Another number lenders use to evaluate how much you can afford is the housing expense-to-income ratio. It is determined by calculating your projected monthly housing expense, which consists of the principal and interest payment on your new home loan, property taxes, and hazard insurance (or PITI as it is known). If you have to pay monthly homeowners association dues and private mortgage insurance, this also will be added to your PITI.

This ratio should fall between 28 to 33 percent, although some lenders will go higher under certain circumstances. Your total debt-to-income ratio should be in the 34 to 38 percent range.

How much will I spend on maintenance expenses?

Experts generally agree that you can plan on annually spending 1 percent of the purchase price of your house on repairing gutters, caulking windows, sealing your driveway, and the myriad other maintenance chores that come with the privilege of homeownership. Newer homes will cost less to maintain than older homes. It also depends on how well the house has been maintained.

Where do I get information on housing market stats?

A real estate agent is a good source for finding out the status of the local housing market. So is your statewide association of Realtors, most of which are continuously compiling such statistics from local real estate boards.

For overall housing statistics, U.S. Housing Markets regularly publishes quarterly reports on home building and home buying. Your local builder’s association probably gets this report. If not, the housing research firm is located in Canton, Mich.; call (800) 755-6269 for information; the firm also maintains an Internet site. Finally, check with the U.S. Bureau of the Census in Washington, D.C.; (301) 495-4700. The census bureau also maintains a site on the Internet. The Chicago Title company also has published a pamphlet, “Who’s Buying Homes in America.” Write Chicago Title and Trust Family of Title Insurers, 171 North Clark St., Chicago, IL 60601-3294.

What is the standard debt-to-income ratio?

A standard ratio used by lenders limits the mortgage payment to 28 percent of the borrower’s gross income and the mortgage payment, combined with all other debts, to 36 percent of the total.

The fact that some loan applicants are accustomed to spending 40 percent of their monthly income on rent — and still promptly make the payment each time — has prompted some lenders to broaden their acceptable mortgage payment amount when considered as a percentage of the applicant’s income.

Other real estate experts tell borrowers facing rejection to compensate for negative factors by saving up a larger down payment. Mortgage loans requiring little or no outside documentation often can be obtained with down payments of 25 percent or more of the purchase price.

How long do bankruptcies and foreclosures stay on a credit report?

Bankruptcies and foreclosures can remain on a credit report for seven to 10 years.

Some lenders will consider a borrower earlier if they have reestablished good credit. The circumstances surrounding the bankruptcy can also influence a lender’s decision. For example, a lender may be more sympathetic if you went through bankruptcy because your employer had financial difficulties. If you went through bankruptcy because you overextended personal credit lines and lived beyond your means, the lender probably would be less inclined to be flexible.

What is Fannie Mae’s low-down program?

Fannie Mae is expanding the availability of low-down-payment loans to help more people nationwide qualify for a mortgage.

Two new programs will help potential buyers overcome the most common obstacles to home ownership, low savings, and a modest income.

To address many first-time buyers’ struggles to save the down payment, Fannie Mae developed Fannie 97. The program provides 97 percent financing on a fixed-rate mortgage with a 25- or 30-year loan term through Fannie Mae’s Community Home Buyers Program.

Fannie Mae’s new Start-Up Mortgage will assist buyers with a 5 percent down payment at any income level. Yet applicants do not need as much income to qualify and less cash for closing than traditional mortgages. Borrowers will receive a 30-year, fixed-rate mortgage with a first-year monthly payment lower than the standard fixed-rate loan.

Freddie Mac, Fannie Mae’s counterpart, also offers low-down-payment loan programs.