Friday, February 15, 2013

What Mortgage Can I Afford in Los Angeles?

As home prices rocket up in Los Angeles, some who fear being left out of ever affording a home are quickly sizing up the market.  Part of that equation is an actual equation.  How much can you afford?  Even if you think you can afford a certain amount, the lender or now the US government may not agree with you.  New restrictions put in place as a result of Dodd Frank have created rules regarding what are safe loans.

See a home mortgage affordability calculator right here.

In some ways determining the amount that you can afford to pay for a new home may seem like a simple process.  You figure out your net income after taxes (the amount of your paycheck), and you subtract all of your other payments and expenses other than housing.  The answer is how much pr month you can afford for your new home.  You would be right, of course, but it isn't quite that simple.

First of all, banks and other lending institutions, have standards that you must meet in order to get a mortgage from them.  While these vary from company to company, there are some rules of thumb that you can use.  The total mortgage payment plus property tax and homeowners insurance AND any association dues, should not exceed 28% of your net income.

Now add all other debt payments for cars, credit cards, installment debt, and the like.  The total of your your cost of homeownership above plus your cost of paying these debts should not exceed 36% of your net income.

Because homes cost more in the Southern California area than they do in say, Detroit, and because the cost of heating and air conditioning is much lower here, many lenders will allow slightly higher ratios than above.  The 28% and 36%  are still excellent standards to use in your own planning.

Another way to look at your personal ability to pay is to compare all cost of homeownership with cost of renting.  This is fairly complicated and cannot be determined by seat-of-the-pants methods.  Calculators set up for this are useful.  Here are things that are commonly overlooked.  Mortgage interest and property taxes are deductible for purposes of IRS personal income tax.  If you are in the 20% tax bracket, you can roughly assume that you will save 20% of your total interest and property tax expense on your federal taxes.  In California, you will also have tax savings on state taxes.

On the expense side, many underestimate the cost of utilities, new furniture, repairs, and upkeep.  Most apartment dwellers do not have high air conditioning bills, landscape expense, or need to replace the roof.  Pay special attention to estimated costs of water, trash, electricity, gas, and sewage.  Add to your budget a reasonable amount for repairs and improvements.

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