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 ...
A revers mortgage program administered by Fannie Mae. ...
A mortgage on which interest is calculated daily based on the balance on the day of payment, rather than monthly, as on the standard mortgage. ...
The house in which the borrower will live most of the time, as distinct from a second home or an investor property that will be rented. ...
Same as term Lead Generation Site: A mortgage Web site designed to provide leads to lenders. A 'lead' is a packet of information about a consumer in the market for a loan. Lenders pay ...
The largest loan size permitted on a particular loan program. For programs where the loan is targeted for sale to Fannie Mae or Freddie Mac, the maximum will be the largest loan ...
A documentation requirement where the applicant's income is not disclosed. ...
A payment made after the grace period stipulated in the note, usually 10-15 days. ...
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 ...
Have a question or comment?
We're here to help.