How to Determine What You Can Afford
When Buying a house in Sonoma County

Why this article doesn’t talk about debt ratios

When I started writing this article, I was going to write about the main factors that Sonoma County lenders look at when determining how much a person can afford to borrow for a house payment. I had the “front end” ratios, “back end” ratios, income multipliers and credit effects all written out. In doing so, I realized that there are all kinds of articles written on this topic. If you want to buy a home in the Santa Rosa area, there are “mortgage calculators” on the internet, great sites for learning about mortgage qualifying and tons of formulas to determine what a person can afford. If you want to learn more about these topics, there are many sites better suited for this purpose than mine and I have listed several in my “LINKS” section.

What seemed to be missing from the information sources was common-sense information about the “human” part of this decision. This is the part where you inform yourself about the options and YOU decide what kind of debt you are comfortable maintaining. Therefore, I deleted all the ratios and formulas and focused on things that you will not find so easily on the internet.

One of my fellow Realtors read this article and commented “I think your article will discourage some people from buying a home”. That is not always a bad thing. Some people should NOT buy a home. This article is not designed to be depressing; but rather to INFORM you. My professional goal is NOT to sell you a house; it is to help you through the entire planning, looking, buying and closing process in a way that is in harmony with your other life goals. If we discover along the way that buying a home right now is NOT the best thing for you, then I am glad I helped in this discovery.

First step to Buying a Home; Pick a budget

The first step in buying a home in the Santa Rosa area is to decide what you can afford. Make this decision BEFORE you start looking at houses. Looking at houses which you CANNOT afford is a recipe for disaster. When you eventually realize that you should not be buying a home outside of your price range, the experience can ruin the enjoyment of looking at homes which you can afford. The final rule that you must always apply before deciding on what you can afford is this; “What makes sense to YOU and what kind of payment are YOU comfortable with”? Use the internet and other local sources to help determine what you can afford. Talk to several lenders as part of this learning process. But be careful.

Some Lenders May use Predatory Lending Practices

Just because a lender in Santa Rosa or Windsor is willing to lend you a bunch of money, doesn’t mean you can afford to borrow that much. A big factor to the recent mortgage crisis is that some lenders really didn’t care if their borrowers could afford to make the final mortgage payment or not. They only cared that they could make the loan and the Buyer would sign the documents. Not enough borrowers asked themselves the question “Can I really afford this payment in three years?” Many buyers did not even understand the way the payments would change over time. This is called Predatory Lending. You avoid being a victim by learning about mortgages, shopping your loan, and being cautious. While this type of lending is not as frequent today due to the major changes forced on the lending industry, it is only a matter of time before it comes back in some fashion or another. So learn to avoid it.

Remember, Buying a Home is Not Your ONLY Goal in Life

Even if you can “afford” a certain monthly payment, doesn’t mean you should have a payment that large. You have other goals in life; “What are these goals and how much money do you need to reach them?” Failure to recognize these other goals can leave you “house poor”. “House poor” is a term for someone who spends so much of their income on their house expenses that they have no money left for other things. This can happen if one spouse quits their job, a new child is born, or most commonly, when people buy more house than they can really afford. Don’t let this happen to you. Only you know what your future plans are, how stable your job is, if you plan to have more children. Hopefully one of the biggest lessons that American consumers will learn from the recent mortgage issues, is that they have to be realistic in their ability to take on debt and be accountable for own decisions.

Your Santa Rosa Lender is ONLY a Consultant

I am NOT saying that you shouldn’t consult a lender to help determine what kind of loan you qualify for; in fact I suggest you talk to several lenders in the Santa Rosa / Windsor area (two at a minimum, three is better). What I am saying is that ultimately only YOU can have a feel for the amount you are really comfortable with. Don’t allow the lender to make that decision for you. Be realistic with yourself and use the lenders as consultants, not as decision makers. It is natural for people to want something they can’t afford. There is nothing wrong with this desire; everybody has something in this category. It’s how you act on it that counts. There are lenders and real estate agents in Sonoma County who would love to make more money by putting you into a house you cannot afford. If you let these people make the decision FOR YOU, rather than become informed and make your own decision, you may be putting your financial future in their hands. Don’t do it.

Differentiate Between Desires and Needs

When deciding how much you can afford to pay for a home, it helps to make a list of the things you “desire” in a home and the things you “need” in a home. This is important because sometimes both of these cannot be met and still be within your budget. Often the difference between two homes is simply items on the “desire” list. If you find a home you can afford with all the “need” list items, often knowing a less-affordable home is just “extra stuff”, makes it easier to keep to your original budget and still be happy. Maybe you can add some of the “desire” items later in a remodel. Life is a series of priorities and trade-offs and the more you know about what is really important to you, the better your decisions will be. Your list of needs and desires is also critical if you decide to work with a real estate agent. A good real estate agent will want to know exactly what is important to you, and how important it is. This helps them carefully pick through hundreds of houses to find the ones that most closely fit your needs and budget.

Use the On-line Mortgage Calculators

As I mentioned in the beginning, one way to start understanding what you can afford, is to experiment with the on-line mortgage calculators. One very interesting experiment you can do with these calculators is to see the impact of lowering the amount of your debt, or increasing your down payment. Play around with these calculators by changing the different amounts for debt or interest rate or down payment. Which of these different amounts can you, personally, have the greatest control over? What does this tell you about buying a home in Santa Rosa or Windsor?

Get a Conditional Loan Approval From a Lender

A good real estate agent should ask you if you are pre-approved by a lender or not. Not only is this a part of determining your budget , but it will also begin the process that allows your agent to identify the properties in the Santa Rosa area which most closely meet your needs. Pre-approval does not necessarily mean that the lender will actually do the loan exactly as they quoted it to you, but it is much better than a simple prequalification letter which, in my opinion, does not mean much these days. If you are considering buying a home in Santa Rosa, Windsor or the surrounding area and you have not started the loan approval process, you should do so.

Another reason is that once you find a house you like, you have a relatively short amount of time to get financing and release your contingency. I have seen many buyers get to the last day of their financing contingency (without a loan) on a home purchase because their lender has been slow to perform. This means the buyer does NOT YET have the money to close on the home. The Buyer is then faced with the decision to drop out of escrow (possibly loosing the house), re-negotiate the agreement (possibly for more money), or going ahead with the deal “hoping” the lender will come through. It is a VERY uncomfortable situation and the earlier you start your financing journey, the less chance you have of getting caught there.

Buying a Home Involves Debt, Credit and a Down Payment,

Regardless of what you can afford today, it will improve with a larger down payment, lower debt and a better credit score. A good project for first time buyers is to pick a monthly payment you feel comfortable with and start putting this amount each month into a savings account, or money market. Start this practice before you think you are seriously ready to buy a home. Requiring yourself to do this every month helps you get a feel for what a particular house payment would be like. The money in this account can also be part of the down payment you will need to purchase a home, which will make your monthly payments lower.

Another good exercise is to examine the amount of your total monthly debt payments. How much of this (like credit cards) is totally discretionary (you spend it just because you have it)? Do you plan to get a new car soon? Is this a requirement or a luxury? Do you have any loans you can pay off faster if you really try? Reducing the amount of debt you have is a key factor in qualifying for a low-interest loan, which means lower monthly payments on your home purchase.

Do you know what your credit score is? You can get a credit report from each of the three credit reporting agencies every year for free. If you don’t know your score, get a report and find out what it is. Go to which is the only online source for a free credit report that is directly authorized by the FTC. There are also countless internet sources for improving your credit score including the Federal Trade Commission's publication on credit scoring. Finally, beware of “Credit Repair Scams”. Read the Federal Trade Commission's publication; “Credit Repair: Self-Help May Be Best”.

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If you have any questions about this article, or would like additional information, please Contact Me and I will be happy to help you in any way possible.

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