How Much Can I Afford
HOW MUCH HOME CAN YOU AFFORD?
Before you begin looking at homes you need to have a clear understanding of your buying power so that you do not over nor underestimate your dream. Getting a pre-approval from your lender will help to understand what that dollar figure is. This is a critical factor in the search process. While your lender will provide you with much more detail, there are four primary factors to consider when determining how much home you can afford: 1.) The down payment (will vary by loan type) 2.) Your ability to qualify for a mortgage and the rate available 3.) Your debt to income ratios (monthly payments versus your monthly income) 4.) The closing costs associated with the purchase of your home.
Down Payment Requirements
Depending on the type of loan that you and your lender decide on, your down payment could range from 0% (for a USDA or VA loan) to 3.5 – 5% (for an FHA loan) to 5% 20% (for a conventional loan). While we can assist you with determining the best course of action for you, your lender is certainly the subject matter expert and who we would recommend you defer to for the right advice.
“Everything is Negotiable”. That is certainly an axiom we consider when negotiating the purchase or sale of a home/property. When you are buying you may expect closing costs to range between 2 – 5% of the total mortgage. Closing cost may include legal fees, loan processing and other bank fees, taxes and escrows, and other fees. These fees must be paid (typically by guaranteed funds or wire) at the time of closing.
Qualifying for your Mortgage
Most lenders require that your monthly payment range between 25 28% of your gross monthly income. However, this ratio will vary based on loan type and lender. Your total debt to income ratio should be somewhere in the 33 – 38% range. Factors to consider when looking at these figures and calculations include:
- INCOME ~ history and stability of income, potential for future earnings and secondary income (bonuses, commissions, child support, alimony, etc.)
- CREDIT SCORE ~ Check out Experian, TransUnion, and/or Equifax. CreditKarma.com and Freecreditreport.com are also good resources.
- ASSETS ~ Cash on hand or other liquid assets such as savings, checking, CDs, stocks, etc.
- PROPERTY ~ The home you are purchasing must appraise at a value that is adequate to mirror a marketable sale to secure the loan.
Your lender will provide you with a list of documents that are required to process your application and formal loan. Be prepared to pull about two years worth of historical financial data.