How Much Home Can You Afford?
When you rent a home, no one asks questions or verifies whether or not you can afford to pay rent – other than confirming your employment and perhaps a credit check. Buying a home is very different. Because you’re typically borrowing a large amount of money, your lender will ask many questions and request even more proof to determine whether or not you can realistically afford to purchase a home. So, what will they take into consideration?
Generally speaking, you can afford a home if no more than 30-35% of your total income is used to pay debts. Lenders will take a hard look at your debt-to-income ratio or how much you are obligated to pay toward debt month-to-month compared to how much you’re bringing in each month. In most cases, having a 43% debt-to-income ratio or higher will make it incredibly difficult - or impossible - to qualify for a mortgage.
When looking at your income, the underwriter (the person that reviews your application to ensure it fits the loan guidelines) reviews your gross income (the amount you make before taxes are taken out) and your actual take-home pay (including any additional income, like freelance income, alimony income, and so on) and compares that to your debts, things like car loans, student loans, and credit card payments.
Costs of Purchasing a Home
Before you begin house hunting, it's important to know how much home you can afford to buy and then live in. Once you understand all of the factors involved in purchasing and maintaining a home, you'll be able to search the properties that fit your budget today and in the future.
Earnest Money Deposit
You've found a property that you love and you're ready to make an offer. After you have come up with an offer price, the next step is to determine how large a deposit you want to make with your offer. You want the "earnest money deposit" to be large enough to show the seller you are serious, but not so large you are placing significant funds at risk. Keep in mind that this money will be tied up throughout the entire purchasing process, so the less you offer means the less you have at risk. On the other hand, a larger earnest money deposit will often attract a seller over a similar offer that includes a smaller deposit. It's important that you balance the risk and the strength of the deposit and make the choice that's right for you.
The down payment is the portion of the purchase price that you will pay in cash instead of including it in your mortgage. On some mortgages a low or zero down payment is needed, such as Robins Financial’s VA mortgages which requires no down payments.
When you get pre-qualified for a mortgage from Robins Financial Credit Union, you'll know how much you qualify to borrow for your new home. With this figure in hand, you'll be able to narrow down your property search to the homes that you can truly afford.
There are expenses associated with your mortgage transaction known as "closing costs." These closing costs may include appraisal fees, attorney fees, title search service fees, escrow fees, homeowner's insurance, Private Mortgage Insurance (PMI), mortgage origination charges, and any points that you are paying to lower your rate.
Robins Financial Mortgage Loans offer quick closings and competitive rates. You can apply for a mortgage loan online or set up your appointment to speak with one of our Mortgage Specialists. The mortgage team at Robins Financial Credit Union is ready to help you on your way to your dream house!