HUD Mortgage Calculator

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Qualifying for a mortgage is one of the biggest steps that a person takes towards owning a home. There are various steps and questions to consider when purchasing a home such as how much you can afford, shopping for a loan, home buying programs and much more. This guide includes all of the information that you'll need to shop, compare and negotiate mortgages while also looking for homes that meet your qualifications and budget.

To Rent or Buy: That's the Question

Many individuals and families go through the same quandary, but what it boils down to is the location. Renting often makes more sense within a city, but it's also about the length of time you plan on staying in one place. The local market also plays a large role in whether you should rent or buy.

Do Research on Your Target Area

When deciding whether to rent or buy, you should first look into the details of the local market. There are certain parts of the country that have better housing markets for buyers such as Toledo, Cleveland and Detroit. You can also look at Zillow's Breakeven Horizon Index, which also looks at the average cost of down payment, purchase price and maintenance costs in different cities. This will give you a better figure as to what it would cost to live in a certain local market. The index will break it down for you in terms of years on a map of the United States. For instance, it would take a short amount of time for buying to become a better option if you wanted to live in Orlando-Kissimee in Florida, where the break even index is at 1.7 years.

Your Length of Stay

One factor really comes down to the length of time you want to live in one area. If you think that you'll live in a location longer than five years, it may be better to buy a home. However there are also housing markets which have made it easier to purchase a home and pay it off in less than three. In terms of investment, you have to decide if it's worth the cost to purchase a house.

Predicting Future Value and Rental Prices

This part requires more research into the housing market where you want to live. If you expect the price of rent to go up drastically, it may be a better time to buy a home, but only if your home will maintain or increase in value. If you can find a cheap investment that is worth the cost, then you may be able to increase its value if the housing market is on the rise.

Utility and Maintenance Costs

There are certain areas where it simply costs more to live based on energy prices. Homes may also have additional maintenance costs such as landscaping, homeowner's association fees, pool maintenance and much more. When you rent, your landlord typically takes care of maintenance costs, but you can still pay a lot in utility bills. On the other hand, you can upgrade your home, remodel, paint, hang pictures and own as many pets as you want to in your own home.

Upfront Costs and Monthly Payments

Renting is much cheaper in terms of upfront costs. Usually you have to pay a security deposit, first month's and last month's rent. With buying a home, you have to come up with a sizable down payment to qualify for a mortgage in most cases. There are other costs as well when purchasing a home such as loan setup fees, property inspections, escrow or title company fees, homeowner's insurance and other costs that may be tacked on. You have to decide if it's worth the investment over time.

Price-to-Rent and Debt-to-Income

These are two terms to remember when deciding whether a home is a good purchase or not. Both price-to-rent and debt-to-income ratios concern purchase price vs. income and rent vs. purchase price. Price-to-rent evaluates mortgage principal and interest, property taxes, insurance, closing costs, HOA dues if appropriate and mortgage insurance if applicable. In addition, tax advantages, rent payments and renter's insurance are also considered as the total cost of renting.

Price-to-Rent

To use the price-to-rent ratio, you need to have the average list price with the average yearly rent for homes in that area. Then you calculate the price-to-rent ratio by dividing the average list price by the average yearly rent price or as follows:

• Average List Price / (Average Monthly Rent x 12) = Price-to-Rent Ratio; or
• $160, 000 / ($1, 050 x 12) = 12.6

Any time you get a price-to-rent number that is less than 15, you should buy. In the example above, this is a home that would be worth purchasing. Any time it is over 15, it's better to rent.

Debt-to-Income

The other ratio to remember is debt-to-income. This measures the total housing cost plus other debt against your income to determine if you can actually afford a home. All lenders use the debt-to-income ratio to qualify you for a loan. It's also used by some rental managers to understand if you can afford the monthly costs. To calculate this number, you divide debt by income to get a percentage. While this doesn't seem complex, it depends on how much debt and income that you have.

Debt covers monthly housing and non-housing debt payments, which includes mortgage payments, property taxes, homeowners insurance, mortgage insurance, student loans, car loans, credit cards, child support and other factors. While not all of these will be present on your credit report, it's important to understand how to calculate this percentage for your home buying purposes. Lenders are much more restrictive in the percentages that they use to determine what interest and principal you qualify for-if at all.

Using an example, you can understand how this ratio works for determining whether to buy a home.

A family wants to buy a small home in San Diego for $500, 000 with a sizable down payment of 25% ($125, 000) to get a $375, 000 loan.

Calculate Debt-to-Income Ratio

• Total monthly housing costs: $2, 415 ($1, 736 mortgage, $100 insurance, $579 taxes)
• Total non-housing debt: $100 (credit card)
• Monthly income: $9, 000
• Debt-to-income ratio = ($2, 415 + $100) / $9, 000 = 27.9%

This is an excellent position to be in for buying this home. The ratio is quite low that they can afford the home.

Using Price-to-Rent and Debt-to-Income

You can simply look up the rent values for the area to determine whether it's worth it to buy or rent a home. Using the above example of the San Diego home, there are parts of San Diego where the rent is as low as $1, 000 a month for a single family home and as high as $15, 000 per month.