Written by Craig Acord, Pyramis Company and Vicki Novak, Netco Title
When you buy a home, the amount you can spend depends on how much you have in cash to use for a down payment and how much you can borrow. A mortgage lender can prequalify you for a loan, which essentially means the lender will ask you a few questions about your income, credit profile and debt, and give you an estimate of what you can borrow based on those facts. However, before you begin looking for a home, you should get a full preapproval from a lender based on verification of your credit and income, because that will give you a more accurate idea of how much you can borrow.
Find Your Own Comfortable Payment
Before you meet with a lender, though, it’s a good idea to evaluate your personal financial situation and come up with a monthly payment range that you can comfortably afford. The reason it’s important to do this on your own is that you may have expenses or financial goals to meet that the lender won’t take into consideration when approving you for a loan. For example, if your greatest pleasure is to play golf several times per month or to ski, or if you’re actively saving money to start a family and hope to have one spouse reduce work hours when that happens, your housing budget should take those factors into account.
You can use your current comfort level with your rent payment and look at your monthly income and expenses to estimate your own ideal mortgage payment. Don’t forget that when you become a homeowner your housing payment will include principal and interest, property taxes and homeowners’ insurance. If your down payment is less than 20 percent, you’ll need to pay mortgage insurance and you should budget at least 1 percent of the home price for maintenance and repairs. In addition, you may need to pay homeowner association or condominium association dues.
Mortgage Loan Qualifications
Lenders have different guidelines that they follow. Most will only allow a maximum debt-to-income ratio of 41 percent to 43 percent. To calculate your ratio, determine your gross monthly income including all income that can be documented through pay stubs or your tax return. Your monthly debt payments will include your new housing payment and the minimum monthly payment on all your outstanding debt, such as a credit card, a student loan, a car loan, alimony, child support or a personal loan.
You can use a mortgage calculator to help you with your estimation. In order to qualify you for a loan and determine your interest rate, a lender will look at a variety of factors, including your income, assets, down payment, credit score, debts and job history. The higher your credit score, the lower your interest rate will be for conventional loans, which in turn means your payment will be lower.
Mortgage Loan Options
Remember that the actual size of your mortgage payment will depend on your loan term and interest rate. In general, a longer loan term will have lower payments, but it will usually have a higher interest rate and you’ll pay more in interest over time because of the term. While it’s important for you to get an idea of your own comfort level with a loan payment, a good lender can evaluate your individual circumstances and make recommendations for a loan program that can meet your financial needs. A good lender can also give you advice that can help you position yourself for a smart home purchase, such as ways to improve your credit or to build up the size of your down payment so you can take out a smaller loan and become a homeowner.