Understanding What You Can Afford
One of the first steps in the home buying process is to fully understand your finances. It’s not as fun as looking at homes, but it’s important and necessary to help you determine how much you can afford.
Buying a home requires that you get a firm handle on your finances, gathering your supporting documentation and answering a handful of questions, including:
- What is your gross income?
- What do you spend each month?
- Do you have credit card debt?
- How much do you have in savings?
To get a rough estimate of what you can afford, most lenders suggest you spend no more than 28% of your monthly income — before taxes are taken out — on your mortgage payment, including principal, interest, taxes and insurance.
Aside from having a firm grip on your income and expenses, it’s equally important to understand the role your credit, mortgage rates and home-related costs play in determining what you can afford.
Your Credit
Lenders look closely at your credit score when deciding whether you qualify for a mortgage loan. Because of the huge role of credit in the home buying process, make sure you understand how your credit score is compiled,how to get a copy of your credit report and how to build strong credit.
Mortgage Rates
Mortgage rates are a key factor in determining how much home you can afford, and it’s important to watch them carefully if you’re in the market to buy a home. The lower the rate, the better because even a small increase in rates can make a home that was once affordable, unaffordable.
Associated Costs
You’ll have to make a down payment of at least 3% — and generally between 5% and 20% — of your home’s purchase price to qualify for a mortgage. Also, when you get a mortgage, you’ll need to pay closing costs that include an appraisal fee, credit report fee, tax services fee and more. These costs will generally run between 2% and 5% of your purchase price.
You’ll want to work closely with your lender to determine what you can comfortably afford. It’s their job to cover all bases and make sure your final number is within your means and aligns with your financial goals.