Most everyone can afford a home, town home, or condominium. There are many properties with mortgage payments under $1,000. For a lot of people, the question is, “How much money do I need and what will my monthly payments be?”
You can easily find out about how much house you can afford by using our calculator, How Much House Can I Buy. If you are seriously shopping for a home, however, you should call us to get a firm idea of the best home loan for you as well as our free pre-approval letter.
What Goes into Determining If I Can Afford a House?
- Credit Score
- Monthly Expenses
- Cash on Hand
Affording a House on Your Income
One of the biggest factors in being able to afford a house is your income. If you want to know what we’ll first consider when deciding what you (and your co-borrower, if applicable) can borrow, there are two things all lenders review:
- Your monthly payments (including credit cards, car loans, student loans), and
- Your income.
The House Payment
Your total house payment includes Principal, Interest, Property Taxes, Homeowner’s Insurance (PITI), and Monthly Mortgage Insurance (PMI)
Monthly Payment Percentages
You will be hearing a lot of new mortgage lingo when you buy your new home, like debt to income (DTI), so lets take a quick look.
- Your front DTI figures your house payment as a percentage of your gross monthly income. For example, if your house payment is $1,000 and your gross monthly income is $4,000, your front ratio is 25 percent. The rule-of-thumb is to have a ratio here that is 20 to 35 percent.
- If you do have other monthly payments like auto, credit card, and student loans, lenders will calculate your total DTI by taking your house payment plus the other monthly payments as a percentage of your gross monthly income. For example, if your house payment is $1,000 and your auto payment is $500, you have total monthly payments of $1,500. This is 37 percent of a gross monthly income of $4,000. The rule-of-thumb here is to have total monthly payments that are 35 to 45 percent of your monthly income.
If your ratios are higher than this please contact us to discuss your situation, as we may still be able to help you. Our How Much House Can I Buy calculator is a good tool for you to try, too.
Affording a House with Your Credit Score
Affording a home means maintaining your credit score. Most buyers have a ballpark idea of their credit score. It is a number value that describes how well you have paid your bills, including your credit cards, home, auto, and other loans.
Your credit score ranges from a low of 300 to a high of 850. To learn which online source we recommend to get a free credit score, go to How Your Credit Score Affects Your Mortgage.
RMCR Required for Home Loan
However, if you want a home loan, you’ll need a Residential Mortgage Credit Report (RMCR). We can pull a RMCR and review your credit report from the three largest credit-scoring agencies, Equifax, Experian and Transunion. This score, sometimes called a tri-merge score, is stricter, a tighter measure of your ability to repay a mortgage. If you ask for a free pre-approval letter, we will provide you with this credit score report at no charge.
Your Credit Karma score and the tri-merge credit report score that lenders pull are not the same, and usually the report that we use will have a lower score. The lower score does not matter much if you have 780 scores, but if Credit Karma says your score is 625 and our report comes in at 575 that is the difference between qualifying and not qualifying for a mortgage!
Affording a House and Your Monthly Expenses
While your credit score and income are critical to getting a home loan, your expenses are a limiting factor that you must absolutely take into account when you’re trying to afford a house. Lenders will review existing auto, credit card, and student loans. These loans are a good credit score indicator for banks if you’ve paid them in a timely fashion. Conversely, late payments on any loans will negatively affect the financial support you receive when seeking a mortgage.
Budget monthly living expenses and payments in order to see how a new monthly mortgage payment will fit in with your current monthly expenses including food and fuel. Owning a home can also bring unexpected expenses, like a roof or heater that needs replacing, so you need to make sure you can cover those expenses and your mortgage payment. Be sure to examine your expenses and income to determine not only how much house you can buy, but how much house you feel comfortable covering.
Affording a House and Your Cash On Hand
Affording a house means having some cash on hand. A seller expects “due diligence and earnest money” along with an offer to purchase. Prior to closing you will also need to pay about $500 for a home inspection and $500 for an appraisal. There are some programs available through government insured loans like USDA and FHA that require no money down, but conventional loans typically require 3% or more down.
Hint: Please try our What’s My Payment calculator to see how the amount of money you put down and the type of mortgage (Conventional, VA, FHA, USDA) you choose will effect how much house you can afford.
Affording a House and the Interest Rate
Once you’ve gathered all of your financial information, you’re ready to apply for a mortgage. The mortgage is the large sum of money that you’re borrowing to pay for the home. Your monthly mortgage payment is calculated by the size of the loan, the number of years you are paying it back over, and the interest rate charged.
The interest rate is essentially a charge for borrowing money. Interest is calculated as a percentage of the amount owed. This means that while you agree to borrow a certain amount, you’re actually paying back the initial loan amount plus interest.
While it’s important to find a low interest rate on your mortgage, it’s important to compare other loan attributes as well. Some of these attributes include: types of loans and lender fees. It’s important to compare all of the statistics from several reputable companies before applying for a home loan.
Affording a House and Your Job Security
You will need to show your work history covering the last two years. A strong borrower will have been on the same job or in the same field or line of work for at least the past two years. If you have recently graduated from college and started a new job, do not worry.
- Being in college counts towards your two year work history.
- If you are self employed, it is important that you have been self employed for the past two years. You may still be able to get a mortgage if you have been self employed for less than two years, as long as you are in the same line of work for the past two years and have filed at least one tax return as a self-employed individual. You will need to send your personal and or corporate tax returns to a lender, so they can calculate your income to see how much house you can afford.
Still Have Questions?
Banks and lenders have different rules that affect how much they’ll lend you. If your finances are simple, start with our How Much House Can I Afford? to get a quick price range. For more information, or to discuss your options, email us at firstname.lastname@example.org or call. We are available after hours and on weekends, too.
Don’t hesitate to call far ahead of your purchase. We can help you set your financing goals. And since we are an independent mortgage broker, we represent many lenders which means you can compare rates and determine the best loan to meet your needs
You have the Carolina Home Mortgage pledge that we’ll answer your questions simply and honestly. Our pledge includes a no-pester promise where we’ll wait for you to call us back if you want to work with us. In fact, if we’re not your best option, we’ll tell you who might be. Integrity counts when you work in a community for 25 years.