First and foremost, one of the biggest questions to ask yourself is “How much house can I actually afford?” or “How much can I get approved for in the mortgage?” Understanding your limits financially and what you are approved for is imperative before beginning to search for homes so that you’re not led astray to houses you know you will not be able to purchase. Here is what is involved in determining how much of a home you can qualify for.
Preapproval Amount vs Affordability
The first thing a buyer needs to do is to obtain preapproval from a specific mortgage lender. The preapproval letter gives the maximum home loan amount and the terms that the borrower is eligible for based on the borrower’s current gross income, assets, liabilities and credit score. However, just because you are approved for a certain amount of mortgage doesn’t mean that you have to take it to the limit. It means the preapproval amount shows the maximum loan amount you can qualify for, not the amount you should use responsibly. This is a significant split. This means that you have to take your time and scrutinize your budget and your expenses to find out how much you can afford to spend on your housing costs. In some cases, this affordable amount may be a little lower than the preapproval amount.
Some of the aspects that determine the eligibility for home loans include
When applying for preapproval, lenders take a close look at several factors that determine the amount they will lend:When applying for preapproval, lenders take a close look at several factors that determine the amount they will lend:
Income – The income you have and how steady it is directly determines home buying capability. Mortgage lenders would like to have guaranteed income, which is sufficient to sustain the mortgage and other expenses. Long-term employment in the same occupation leads to improved conditions.
Debt load – All debts that you have influence the amount you are eligible to borrow for a mortgage. Your credit-to-income ratio is determined by your proposed housing payment and other monthly obligations like car payment, student loans, credit card payment, child support etc. The less your current liabilities are, the higher loan amount you can avail for mortgage.
Credit Scores – Credit history and the scores are crucial factors that are considered when approving loans. As a rule, a client with high scores gets the better conditions for a mortgage. It is frequently assumed that numbers below 620 are subprime, while numbers over 740 indicate excellent credit, offering better rates/terms.
Down Payment Amount – The more money that is paid upfront, the better it is when it comes to approval. The most favorable rates are given to those willing to put down 20 percent; all other cases may entail private mortgage insurance.
Type of Mortgage – It is known that some types of mortgage are more forgiving than others when it comes to approval terms. VA and USDA loans are available at 100 percent financing to eligible individuals. Traditional mortgages may demand more cash outlay for down payment and other closing costs but might also have reasonable interest rates.
Setting Up Your Target Price Range
It is therefore advisable not to rely solely on a preapproval letter and the estimated loan amount therein. Take some time to carefully calculate your affordable price range for a home:Take some time to carefully calculate your affordable price range for a home:
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Sum up all home expenses for the month - The total amount you will spend on housing will be the sum of your monthly mortgage payment, homeowners insurance, property taxes, mortgage insurance if you have any, and HOA fees if you are a part of any.
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Utility bills – Just browse on the web to find out how much the common utilities in your community cost and consider these amounts when planning your budget.
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Total monthly debts – Write down all other minimum monthly debt obligations (auto loan, student loans, credit cards, child support, etc. ) and sum them up.
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Total monthly income – debt + new housing costs – The total monthly income after taxes should be decreased by both the calculated debts and the expected additional costs of housing.
- Multiply the remaining amount by 28% – it is recommended that no more than 28% of gross income should go to housing. By multiplying this number by 28%, one can determine how much is easily affordable towards housing.
This last figure will give you a good realistic range for the maximum purchase price of home you can get approved for and comfortably afford based on your situation. It is always better to look for a home that is easily affordable in comparison to the preapproval amount. Being able to shop below the upper limit helps in creating some space financially. After setting up the affordable price range for the property, arrange to meet real estate agents and banks to begin with property viewing in the said price category.
How to Get More Money for a Mortgage:
If your affordable price range appears lower than expected, then there is no need to worry. Here are some tips to increase mortgage eligibility:Here are some tips to increase mortgage eligibility:
Save for a larger down payment – Paying more money up front has the effect of instantly increasing your purchasing capacity. Ideally try and get it down to 20 percent.
Repay existing debts - This reduces the outstanding revolving credit card balance and loans which are part of the debt ratio.
Increase your credit rating – the higher your credit rating, the better the mortgage rate and conditions that you are offered.
Choose a more economical/home-buying option - Think about reducing the features, size, or area of the house. Small houses that require the occasional repair work are cheaper but can still be useful to you.
Alter loan options – Fixed interest rate mortgages can at times be cheaper and easier on the pockets initially than the 30 year fixed-rate mortgage. Or search for first time home buyers assistance in your state.
Take second job/freelance – This indicates to the lenders more temporary income and can complement your buying power.
Be patient and save longer – Wait longer for your savings to build up and increase the timeline of paying off debts to further enhance your qualification to buy a home.
A Shopper’s Guide to the Right Products for You within Your Means
However, before deciding on what to borrow, it is important to make sure it is within the affordable range according to a comprehensive review of the financial capability. This minimizes the chances of finding the perfect house only to realize it is not within the financial capability. Shopping well below your maximum preapproval amount also adds a certain measure of financial safety so that homeownership is not a feeling of being weighed down.
