The absolute first step before starting to look for a new house, is figuring out how much you can realistically afford to pay. You’ll have to take a good look at your budget, debt, credit reports, and credit score. Once you have a good picture of your financial status, start saving! The more money you have in the bank, and available for extra expenses that come with buying a house, the better.
Depending on the condition of your finances, if you have a lot of debt, errors on your credit report, or a low credit score, it could take 6-12 months or more to repair! If your credit score falls below 620, lenders may see you as a risky borrower.
Determining a Mortgage You Can Live With
There are a few basic formulas commonly used by lenders to determine how much of a mortgage you can reasonably afford. These formulas are called qualifying ratios. They estimate the amount of money you should spend on your payments, in relation to your income and other expenses. It is important to remember that these ratios may vary from lender to lender, and each application is handled individually, so the guidelines are just that – guidelines.
Generally Speaking… To qualify for a conventional loan, housing expenses should not exceed 26-28% of your gross monthly income. Monthly housing costs include:
- Mortgage Principle
- Taxes and Insurance
Example: If your annual income in $30,000, your gross monthly income is $2,500, and $2,500 x 28% = $700. So you would probably qualify for a home loan that requires monthly payments of $700.
When budgeting to buy a home, it is important to figure into your monthly expenses costs such as utilities and maintenance. Generally speaking, if your finances are in decent shape, you should be able to afford a home priced at 2-3 times your gross yearly salary. Using a mortgage calculator can give you a rough idea of how high a mortgage you may qualify for, but speaking to a lender in person will give you a more accurate figure.
When you apply for a loan, every piece of information MUST be complete and accurate, anything less is considered FRAUD.
- Before you sign anything ~ read and make sure you understand it
- Refuse to sign any blank documents
- Accurately report your income, employment, assess, and debts
- Don’t buy property or borrow money for someone else
- Don’t change your income tax returns for any reason
- Tell the whole truth about money gifts
- Don’t list fake co-borrowers on your loan application
- Be truthful about your credit problems, past and present
- Be honest about your intention to occupy the house
- Don’t provide false supporting documents
Don’t be discouraged! If your loan application is rejected, find out what the problem is and how it can be resolved. You may need to look for a less expensive house, or save more money. Either way, it is still a good idea before starting to look for a new house, to figure out how much you can realistically afford to pay.