Affordability
The definition of affordability in real estate is simply a buyer’s capacity to afford a house. Affordability is usually expressed in terms of the maximum amount a buyer will be able to pay for a house, and subsequently be approved for a loan in order to pay this amount. In real estate, this is known as the maximum affordable sale price, and it can be empirically calculated with relative ease.
To calculate the maximum affordable sales price, you’ll need to take into account three different metrics by which the maximum affordable sales price is calculated. These are the income rule, the debt rule and the cash rule. After calculating each of these numbers, affordability will be the lowest of the three. Let’s take a closer look at each of these rules in turn, and see exactly how they come into play in calculating the maximum affordable sales price.
The Income Rule in Affordability
This rule states that a borrower's monthly housing expense (MHE), which is the sum of the mortgage payment, property taxes and homeowner insurance premium, cannot exceed a percentage of the borrower's income specified by the lender. Once you’ve calculated a buyer’s MHE, you have their maximum affordable sales price according to the income rule.
The Debt Rule in Affordability
The debt rule says that the borrower's total housing expense (THE), which is the sum of the MHE plus monthly payments on existing debt, cannot exceed a percentage of the borrower's income specified by the lender. Once calculated, this number is often lower than the number that you might arrive at using the income rule, making it essential for calculating the maximum affordable sales price.
The cash rule in Affordability
The required cash rule says that the borrower must have cash sufficient to meet the down payment requirement plus other settlement costs. When the cash rule sets the limit on the maximum sale price, the borrower is said to be cash constrained. This number can be raised by lowering the down payment.
Popular Mortgage Terms
The highest rate possible under an ARM contract; same as 'lifetime cap.' It is often expressed as a specified number of percentage points above the initial interest rate. ...
The process of determining whether a prospective borrower has the ability to repay a loan. Qualification Versus Approval: To be approved for a loan, a prospective borrower must ...
Advice on where to go to get a mortgage. A borrower can always select a loan provider by throwing a dart at the Yellow Pages. A referral is of value if it raises the probability of a ...
A contract provision that adjusts the payment on an ARM periodically to make it fully amortizing. ...
The option to convert an ARM to an FRM at some point during its life. ...
A documentation requirement where the applicant's assets are not disclosed. ...
A mortgage lender that sells all the loans it originates in the secondary market. ...
Rates and points quoted by loan providers. You cannot safely assume that mortgage price quotes are always timely, niche-adjusted, complete, or reliable. Timeliness: Most mortgage lenders ...
On an ARM, the assumption that the interest rate rises to the maximum extent permitted by the loan contract. ...

Have a question or comment?
We're here to help.