When most people start their home buying process, they begin in what they think is the best place: searching current home listings for the right property to purchase. Finding that perfect home in the ideal neighborhood is the goal, and certainly the fun part of home shopping, but if you go straight to the search, you’re actually missing out on a critical step before that: calculating how much home you can afford. Here are the factors to take into consideration when trying to determine your budget so you can find that dream home and be able to get qualified for a loan and make the payments.
The first factor in determining how much you are likely to get approved for on a home loan is your total monthly income. This may be a salary from a job, but it could also include alimony, investment income, and other sources that you can count on for regular income. Even though lenders often use gross monthly income to determine your eligibility for a loan, you will need to make calculations based on net income after taxes and other withholdings are taken out.
2: Monthly Obligations
Once you know how much money you have coming in each month, the next step is to write a detailed budget that includes all your monthly obligations. Start with the stuff you have to pay—car loans, student loans, and credit cards or other revolving debt—then move to essential like groceries, car insurance, and utility bills, then finally leave some wiggle room for non-essentials like entertainment and clothing. If you’re not sure on some of these things, track your spending for a few months before you start this process so you have an accurate picture of your spending.
3: Down Payment & Closing Cost Cash
Most lenders today don’t have a lot of options for zero down payment loans, although they do exist and might be an option for some buyers. For all the other home buyers, you will need to have at least 3% to 5% to put down on a home, but preferably you should have between 10 and 20% of the total purchase price to put down (the amount you will be required to put down depends on the type of loan(s) you are eligible for). Also note that if you do not put down 20% you will have to factor in private mortgage insurance (PMI) in your monthly payment.
4: Credit Score
One final factor before you start home shopping is to take a look at your credit score. Having a poor credit score can significantly impact your ability to get approved for a home loan. In addition, if you are highly leveraged (with lots of outstanding debts on your credit report), a lender will view you as more of a risk and may reduce what they are willing to loan you.
Many future homeowners go and get pre-qualified for a mortgage to get an idea of how much they are likely to be able to borrow, but it’s important to note that sometimes lenders will tell you that you can get approved for an amount that is much higher than your current budget and lifestyle can support. Don’t think that you have to purchase at the top end of your pre-approval amount—take all your calculations into consideration before you decide.
To find out more about loans for homebuyers and get pre-qualified or pre-approved, call Altius Mortgage today.