Affordability
Definition of "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
Total costs charged to the borrower that must be paid at closing, by the borrower, the home seller, or the lender. In dealing directly with a lender, settlement costs can be divided into ...
To define a home equity line of credit, we can also take a look at how credit cards work. Similarly to credit cards, home equity lines of credit are sources of funds that can be accessed ...
When a borrower has difficulty making the scheduled payment. Position of the Lender: A good place to start is by understanding the position of the lender. A game plan for survival ...
All the combinations of interest rate and points that are offered on a particular loan program. On an ARM, rates and points may also vary with the margin and interest rate maximum. ...
The definition of interest is extremely important in today’s business environment where lending and borrowing money are the power stations of our economy. A widespread definition of ...
An agreement by the lender not to exercise the legal right to foreclose in exchange for an agreement by the borrower to a payment plan that will cure the borrowers delinquency. ...
A mortgage on which half the monthly payment is paid every two weeks. This results in 26 payments per year, which is the equivalent of 13 monthly payments rather than 12. Because of the ...
The date on which the closing occurs. On a purchase transaction, there is no financial advantage to the buyer/borrower in closing on any day of the month, as compared to any other day. ...
A multi-lender Web site that offered borrowers the capacity to shop among multiple competing lenders. ...
Have a question or comment?
We're here to help.