Real Estate Tips

How Much Should a Family Pay for a Home? (Part 2)

A first step in the evaluation of the home investor’s financial position is a listing of assets which can be converted into cash for a down payment. This list should include assets which can be used as collateral for loans as well as sources of gifts or loans from friends and relatives. The following list suggests the usual items:

- Checking account
- Saving account
- Bonds (market value less broker’s fees)
- Real estate (market value of equity less broker’s commission)
- Life insurance (loan value)
- Potential gifts
- Potential loan from relatives (interest rate, terms of repayment)

The analysis of earning capacity must cover both the present and the prospective levels of income. In occupations where earnings fluctuate, such as in selling on commission, the average income based on the last three to five years is a sounder basis for judgement than the income for any one year. The earnings of secondary workers, wives and children should be judged in terms of how long they can be counted on. Income other than earned income-from investments, roomers, gifts and so on must be evaluated in terms of reliability and duration.

It is true that the level of income of the primary earner may change; it will then be unwise to undertake a long-term obligation which can be met only if the present level of income continues. The important point here is that both income and obligations must be forecasted over the period of the proposed mortgage loan contract in order to judge the probability that payments can be met over its entire term.

Obligations must be deducted from income to determine the balance available for housing expense and home investment. The first deduction is the income tax and the deduction for retirement benefits and other regular withholdings.