What house can I afford?
If you want to buy a home, you’re probably asking yourself that question right now.
The answer depends on your income and credit score, the type of loan you qualify for and where you want to live. Below, we are breaking it down into more detail so you can figure out exactly what type of house you can afford.
Lenders aren’t primarily concerned with your salary. Rather, they want to know whether you have enough income to manage your debt. To figure that out, they use what’s known as a debt-to-income ratio (DTI). Your DTI compares your monthly income to your monthly debt payments to arrive at an approximation of whether you can afford a mortgage payment and if so, how much. A lender can tell you whether you qualify and if not, what you need to do to improve your DTI so you can.
Your credit score indicates how responsible you’ve been about paying your bills on time. Generated by a computer algorithm, a credit score is actually a numerical representation of the information in your credit report. A lender can access your report, “pull” your score and tell you whether your score is high enough for you to qualify for a mortgage. If it isn’t, the lender can help you figure out how to raise it. Together, your DTI and credit score are the most important factors to answer the question, “What house can I afford?”
Type of Loan You Qualify For
Lenders offer multiple different types of mortgages for home buyers. Examples include:
• Conforming loans that meet Fannie Mae or Freddie Mac guidelines.
• Jumbo loans that some people need to buy a home in a high-cost housing area like Honolulu, Los Angeles, New York, San Francisco or Washington, D.C.
• FHA loans insured by the Federal Housing Administration, a U.S. government agency.
• VA loans guaranteed by the U.S. Department of Veterans Affairs.
• RD or USDA loans backed by the U.S. Department of Agriculture. RD refers to Rural Development.
Your down payment and the type of loan you choose will determine your monthly mortgage payment and which house you can afford.
Some loans allow you to buy with a small down payment, such as 3.5 percent or 5 percent of the home’s purchase price, or even no down payment at all (such as a VA loan). If you make only a small down payment, you’ll probably have to pay for lender’s mortgage insurance or a funding fee that can be financed as part of your loan amount. Keep this in mind when calculating your mortgage payment and how much house you can afford.
Houses in prime locations typically cost more than houses in cities, neighborhoods or school districts that are less desirable. You’ll need to do some research online, talk to at least a few real estate agents and visit different areas in person to figure out which locations meet your needs. Feel free to visit the area multiple times throughout the week – in the morning, in the evening, at night and on the weekend to get a feel for the community.
Once you nail down these four things, then you’ll have your answer to “What house can I afford?”
Marcie Geffner is an award-winning reporter, editor, writer and author covering a number of topics including real estate, mortgage and banking. She is currently a full-time freelance reporter. Marcie is a former board member of the National Association of Real Estate Editors and remains an active organization member.
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