Buy A Home in Denver, CO: How to Maximize Your Home Buying Power

If you are looking to buy homes in Denver, Colorado, the first thing that should strike you is what can you afford. Here, a distinction should be made between what you can afford and your total buying power which is your purchasing potential.

This post will go into the subtle differences between the two concepts and what you must consider when you buy a home in Denver, CO.

What is Buying Power

Your buying power is the amount of money that you have to make the mortgage payment each month after accounting for all the expenses including recurring bills. Several factors affect this buying power – money from the sale of your current home, money saved for a down payment, and what you are qualified to borrow.

Your buying power will become clear once you put together all these variables. You will now know whether you should buy a home in a low-price range or a larger home in a preferred neighborhood that meets all your family’s requirements.

What is Housing Affordability

Housing affordability is a metric that is widely used by real estate professionals like us at Just Livin Realty. Here, we estimate whether an average family earning an average wage can qualify for a mortgage to pay the average home price in Denver.

Even though this parameter plays a big role in researching the market before buying homes in Denver, homebuyers need not attach great importance to it. The benchmark of affordability based on your income and other factors might be different from the affordable level of other average buyers. 

The Importance of Buying Power  

The starting point of most homebuyers is to look at the price tag to determine whether they should buy a particular property or not. This can be misleading as it is necessary to go a step further and consider what your total monthly payments will be when you buy a home in Denver, CO.

Remember, the price tag is only indicative of the mortgage payments that you will have to make. To arrive at the buying power, you must consider other expenses related to the house too – monthly maintenance, premium on home insurance, annual property tax, and more. You should also set aside some funds for unexpected repairs or renovations.

Once all these expenses are calculated, you can accurately estimate your buying power. This monthly outgo is what you will live with and not the sales price.       

After you have clarity on your buying power, you will be able to buy the home you want, instead of settling for a home because you feel it’s the only one you can afford. It will also prevent you from becoming “house poor,” a common term for someone who has put all their money toward the down payment, leaving them nothing left over for fees outside of their monthly house payment.

Both scenarios can negatively impact the lifestyle you want to live. Understanding your buying power can help you get the home you want without sacrificing the lifestyle you desire.

If you haven’t sold your current home yet, a Comparative Market Assessment (CMA) will give you a general idea of how much you may get for your home based on what other homes have sold for in your area. Contact our team for a FREE CMA!

How To Calculate Your Buying Power

We now come to a critical question – “How do I know what my buying power is before I buy homes in Denver, Colorado?”

Buying power is calculated by adding all the money that flows to you. Typically, these include the following:

• The money you have saved for a down payment
• The money you made from selling your home minus fees and mortgage payoff (if at all)
• Your monthly pay, commissions or tips, dividends from investments.
• Payments from rental properties or other monthly income you receive
• The loan amount you are willing to finance and qualify for.

These are the total of your income that can be used to make your monthly payments and constitute your buying power. 

Lenders generally advise borrowers to earmark not more than 35 to 45 percent of pre-tax income on housing. Conservative experts peg this amount at 25%. Ensure that expenses on your home such as insurance, taxes, and maintenance are factored into this amount.  

Traditionally, mortgage lenders have targeted the ideal housing expense amount to be a ratio of 28 percent or less.

These figures throw up an important point – do not stretch your resources and income to the limit to buy a home in Denver, CO. Lenders will look at your overall financial capabilities to service mortgage payments when they decide on the quantum of the loan. While it may be tempting to take out a large loan to buy a house that is the pride of your neighborhood, the less money you borrow, the higher will be your buying power.      

4 Things That Impact Buying Power

1. Credit score. A great score can help you lock into a lower interest rate.
2. Debt-to-income ratio. The lower the ratio, the better risk you may be to lenders as long as you have an established credit history.
3. Assets, including the documentation of where the money for the purchase is coming from and the mix of your investments.
4. Down payment. The more you’re able to put down on the average house price in Denver, the less you will have to borrow. With a down payment of 20 percent or more, you won’t have to purchase private mortgage insurance (PMI) and you may also be able to negotiate a lower interest rate.

How to Save for a Down Payment

If you’re thinking to buy homes in Denver, Colorado one day, start saving for a down payment TODAY!

Here are some tips to make saving easier.

First-time buyers:

1. Set a savings goal. One way to figure out how much to save is to find out the average house price in Denver for homes that are like what you want. Next, figure out your target down payment percentage. For example, if homes are selling for $200,000 in your area and you want to put 20 percent down, you’ll have to save $40,000.

Set a goal to save that amount within a specific period. Do not take ages to do so as the real estate market is very volatile and your average home prices can take an upturn at any time. Although most buyers save for six months or less, 29 percent of all buyers (and 31 percent of first-time buyers) save for more than two years for a down payment.

2. Cut back on expenses. This might be tough as a lot of compromises have to be made. Go through your monthly expenses and find ways to cut corners without substantially affecting the quality of your life.

Most people aspiring to buy a home in Denver, CO focus on cutting back on non-essentials such as spending on entertainment. Reduce expenses on things that you can live without while saving for a down payment.

3. Look for ways to boost your income. Get a side job or sell items online or at a garage sale to increase your income in a short amount of time. Be sure to save any windfalls you get, including your annual income tax refund or work bonuses.

4. Check out home-buying programs. Your state, county or local government may offer special programs, such as grants, for first-time buyers to use.

5. Ask your family. Thirteen percent of all buyers, and 24 percent of first-time buyers, were given money from family or friends to use toward the down payment of their home.

Repeat buyers:

More than 52 percent of repeat buyers used the proceeds from the sale of their primary residence toward the down payment on their next home. Similarly, 76 percent tapped into their savings accounts. If you’re thinking of buying another home, here are more ways to save more money, in addition to the tips listed above:

1. Rent a room. If you have an income flat (or mother-in-law unit) attached to your home, rent it out and channel the income into a high-interest savings account.
2. Make your money work for you. If you don’t plan to buy for at least five years, invest it and let the compound interest work for you. Discuss this option with your financial planner or broker to see if this is ideal for you and your goals.
3. Tap into your 401(k). If you have a 401(k) plan, you may be allowed to borrow a portion of it, the lessor of up to $50,000 or half of its value, for your down payment. Remember, it’s a loan so you’ll have to pay it back. If you leave or lose your job before you’ve repaid the loan, you’ll have between 60 to 90 days to repay the balance or face stiff taxes and penalties.

If you want to buy an investment property

Whether you’re buying a second home or a rental property, here are a couple tips to save for a down payment.

1. Tap into your equity. If you’ve paid off or paid down your mortgage on your primary home, you may be able to tap into your equity to purchase another property. Contact your lender to learn more about a HELOC or home equity loan.
2. Get a partner. Find a friend or relative who’s willing to purchase property with you. Typically, you’ll split the costs and profits equally. Just make sure to work with an attorney to create a partnership agreement to fit your situation.

Work Out Your Buying Potential

What’s your buying potential? Fill out this worksheet to get an estimate.

Housing Expense Ratio:
1. Monthly income before taxes	$
2. Multiply line 1 by 0.28	X 0.28
3. Monthly mortgage payment (PITI) should not exceed this amount	= $
4. Monthly income before taxes	$
5. Multiply line 4 by 0.36	X 0.36
6. Total monthly payments on all debts (including mortgage) should not exceed this amount	= $
7.  Subtract the total monthly payments on all outstanding debts (e.g., car loans, credit cards, student loans, etc.)	– $
8. The monthly mortgage payment should not exceed this amount	$
9. Look at line 3 and line 8. The lower figure is an estimate of the maximum mortgage payment in consideration of your income and debts.	$
10. Multiply line 9 by 0.80	X 0.80
11. This equals portion of your mortgage payment that is the principal and interest only	$
12. Use the table below to see the size of the loan you may be able to obtain with this monthly mortgage payment.

Source: Iowa State University Extension, What is your house-buying power?

Monthly Payment on 30-Year Fixed Rate Mortgage (Principle & Interest Only)

Loan amount	4%	5%	5.5%	6%	6.5%	7%	7.5%
$400,000	1910	2147	2271	2398	2528	2661	2797
$500,000	2387	2684	2839	2998	3160	3327	3496
$600,000	2864	3221	3407	3597	3792	3992	4195
$700,000	3342	3758	3975	4197	4424	4657	4895
$800,000	3819	4295	4542	4796	5057	5322	5594
$900,000	4297	4831	5110	5396	5689	5988	6293
$1,000,000	4774	5368	5678	5995	6321	6653	6992

Didn’t see your desired loan amount? Use the table below to estimate your monthly payment (principal and interest) per $1,000 of your loan. To figure out an estimated loan payment, multiply the factor by the number of thousands in the amount of your mortgage.

For example, if you intend to borrow $400,000, with a loan term of 30 years at 4% interest, multiply 4.77x 400 = $1908 per month.

Interest Rate	15-Year Term	30-Year Term
	Monthly Payment	Monthly Payment
3%	6.90	4.21
3.5%	7.14	4.49
4.5%	7.64	5.06

Source: HSH.com http://www.hsh.com/mopaytable-print.html

Don’t forget to factor in property taxes and insurance. These are often added to your principal and interest of your mortgage payment—the money used to pay down the balance of your loan and the charge for borrowing the money. Since these numbers vary, contact your county assessor’s office for the current property tax rate and your insurer for a home insurance quote. Once you have these figures, divide each by 12 to estimate how much they’ll add to the above payment amounts.

Do you want a clearer picture of your buying power? Would you like to see what kind of homes you can get with your buying power? Give us a call!

Sources: 1. National Association of REALTORS https://www.nar.realtor/topics/housing-affordability-index/methodology

2. Moneyunder30.com https://www.moneyunder30.com/percentage-income-mortgage-payments
3. Credit.com https://www.credit.com/loans/mortgage-questions/how-to-determine-your-monthly-housing-budget/
4. National Association of REALTORS, 2016 Profile of Home Buyers and Sellers
5. Iowa State University Extension, What is your house-buying power? https://store.extension.iastate.edu/product/pm1460-pdf
6. HSH.com http://www.hsh.com/mopaytable-print.html