When you start to think about the process of buying a house one of the first questions a future buyer asks is how much home can I afford? There is so much more to this question that you would think.
The first step and most often the longest step in preparing to buy a home is to start saving money. Why? You’ll need money for your downpayment. There are some loan programs out that will allow you to put down as little as 3.5% of the purchase price to be put down towards the purchase of your home. Many folks think that they need the traditional 20% like their parents did. While this is great if you are able to save up for it, it isn’t always realistic. If you find yourself in a situation where it’s hard to save money one way to help is to look for loan programs that offer downpayment assistance. They can often be found at your state and local levels. Not to mention that if you are a first time home buyer there are often incentive programs out there for you. To find out what options are available to you talking to a trusted local lender is important.
While you’re saving for your downpayment another expense to remember when you buy a home is that you will have closing costs – the fees associated with conducting the real estate transaction that will need to be paid as well. These feels are on top of your downpayment. Having your lender and/or title company prepare an estimated closing cost sheet will help you plan for these expenses.
Once you’ve saved for your downpayment and closing costs you may think that you’re good to go, however there’s something else that you need to consider because your lender certainly is. It’s your debt to income ratio. Lenders look at this to see how much debt you have compared to how much income you’re bringing in. Many buyers do not realize that lenders will be looking at this in addition to your credit score. While your credit score allows the lender to see your track record with making payments on time, the debt to income ratio allows the lender to see how well you handle your money and if you are capable of taking on more debt.
As the lender looks at this ratio they like to see a debt to income ratio under 50%. If your debt to income ratio is above 50% it is a good idea to take steps to lower it before applying for a home loan. This ratio is going to greatly factor into how much a lender is willing to lend to you, what your interest rate will be, and other loan terms. If you are sitting at close to that 50% mark I would encourage you to work to pay it down if at all possible.
After preparing for all of these things you may say I’m ready to buy that house and find out how much I can afford. As you prepare make sure that you also have some funds saved up for moving expenses, utility hook ups (yes some do request a deposit), any new furniture you may need to buy (do not buy this while in the process of purchasing your home, any large purchases can change your debt to income ratio and affect your ability to procure your home loan) and finally any home improvements you may want to make after you move in.
There are many factors that go into determining how much home you can afford but what I ultimately like to tell my clients is that it’s not about how much you were approved for, it’s about the monthly payment you are comfortable with. If the loan amount you are approved for is going to put you with a mortgage payment that you are stressed out about making each month then you will be missing out on the joy that is home ownership.
For more great information on preparing to purchase a home be sure to check out Fannie Mae!