Deciding how much home you can afford is the first step you must take to purchase a house. It is also a critical step in the home buying process. The last thing you want is to fall in love with a home that you cannot afford. Determining your price range can help you survey the real estate offerings with a more critical eye and give you the insight to make an offer that will benefit both you and the seller. There are many aspects of your financial situation that will be taken into account when determining how large a mortgage you can afford.
Your Credit History Is A Large Factor
Your credit report should be free of late payments or defaults. If you do have some negative marks in your credit history, make sure you can explain them to a mortgage lender. For instance, most lenders will understand if a late payment was the result of being sick and unable to work during a short period of time. Nevertheless, your credit history, for the most part, will be the yardstick that you will be measured against.
Your Down Payment Means A Lot
The amount of money that you can put down on a home has a greater significance now more than ever. If you do not want to pay private mortgage insurance (PMI) included in your monthly mortgage payments, then you will need to come up with 20% down for the purchase price of your new home. Private mortgage insurance is meant to protect the lender should the borrower default on his loan.
Your Income And Expenses Influence The Size Of Your Mortgage
Your income, of course, plays an essential part in how large a mortgage you can afford to borrow. Your income is calculated as net income or on an after-tax basis. Your overall expenses also impact what you can afford to pay in mortgage payments. Other expenses that you are obligated to pay such as credit card debt and legally ordered obligations (alimony and child support) are considered when you apply for a mortgage. Typically, lenders like to see a debt to income ratio of 38% of your gross monthly income before taxes or less be required for consumer debt in order to qualify you for the best loan terms.
There are several rules of thumbs in financial, and applying for a home is no different. One popular rule of thumb states that your mortgage for a home should not be more than two and a half times your annual salary. Once you assess your financial situation, you will have more information and will be able to better choose the best home for you. If you determine that you still can’t afford the house you want, then you will need to make some adjustments in your lifestyle, consider choosing a smaller home, or focus on reducing your debt and increasing your credit score. With a little focus on the factors that lenders look at when evaluating you for a mortgage, you can work to maximize how well you look in the eyes of mortgage lenders.
(photo credit: Shutterstock)