How much home can I afford?

How Much House Can I Afford?
One of the first steps when you are thinking of buying a home is determining your budget. It’s a big let down when you look at houses in a price range way over your budget. It is generally recommended that you look at houses within your price range so that your eyes aren’t bigger than your wallet. One way to do this, is to let your agent connect you to a trusted lender. Most agents have relationships with lenders they rely on. But we get it…you may not be ready to give over W2s and have your credit run. Especially if you are just starting to look, you may just want some basic guidelines to figure out how much house you can afford.
Here are the main factors:
1. Income. While this may be obvious, your income will have a big impact on what you have the ability to purchase. One thing to consider is whether you are an employee, contract worker, or self-employed. Lenders will have different criteria to meet depending on your source of income.
2. Debt. Although some people have a large income, they may be able to afford less house. Why? The amount of debt related to their income is a huge factor. Have two large car payments, a student loan, and a bunch of credit cards? Well you might be able to afford less than someone with a smaller income that is debt free. Generally, your debt-to-income ratio should be lower than the mid 30%. A general rule of thumb is that your mortgage should be 28% or less of your income and your total debt should be less than 36%. Not all debt is created equally though. It may be handy to speak with a lender that will (usually for free) prioritize your debts to pay off to have the biggest impact on your credit score.
3. Down Payment. Lots of cash in the bank? Can you put it towards your new home? Your down payment is the amount up front you put towards the purchase price. Of course, a bigger down payment equates to a smaller loan amount. There are a lot of different loan programs and each has specific minimums for down payment. Certain loans require no down payment, others 3%, 5%, 10%, 20%, and 25%. Talking to an agent and lender can help you understand the different loan types available to you. (Are you a veteran? We’ve got good news for you!)
4. Interest rate. Determined by several factors, the interest rate you get can considerably impact your monthly payment. There are also many factors that affect this. But one thing is certain, interest rates are currently LOW. Like, really low ?.
5. Loan term. How long will your loan be? Usually 30 years is the maximum with the lowest payment. But loans come in many shapes and sizes. The shorter the term, the more principal (how much you owe) is paid off with each payment. Often a loan for a shorter term has an even better interest rate because the less time the loan is outstanding, the less risk the lender assumes.
6. Credit score. The better your credit score is, generally, the better your rate will be. Lenders see borrowers with a higher credit score as less risky. For this reason, they offer even better terms to people with high scores. There are programs for people with many different score ranges.
7. Taxes and insurance. In most cases, the cost of your annual property taxes and your homeowner’s insurance policy are rolled into your monthly payment. The mortgage company pays these items on your behalf and divides the payment amount up monthly for you. This is your escrow account. Property taxes vary by location and you can shop for insurance rates. Many insurance companies will give you a discount if you have your home and auto insurance with them. And an insurance broker will shop multiple companies for you and offer you the most competitive rates.
8. Closing costs. When a loan closes, there are usually fees and expenses collected outside of the loan itself. Some of these simply get your escrow account balances full, others are various fees for things like appraisals. Closing costs can be several thousand dollars. It is possible during negotiations, to sometimes ask the seller to pay these costs on your behalf. But a word of caution: sometimes asking for closing costs makes your offer less competitive. This will net the seller less money at closing, so speak with your agent to understand how to properly structure and offer. In more competitive markets, this practice is rare.
9. Cash. I would be silly to not include cash purchases here. Some people have enough liquid assets to pay for their home in full. There is no monthly payment and no interest this way. Obviously, the amount of house you can afford is easy to figure.
There are so many factors to how much house you can afford. There are online mortgage calculators, but these are usually fairly simple and don’t give the whole picture. Use these with caution and as a starting place only. If you are getting serious about a home purchase, speak with a great agent and connect to a great lender. Some people are very surprised after talking to a professional. Everyone’s situation is different, so get the best advice!
Call our loan expert, Dave Setters, at 502-468-492 .

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