The Basics
Selecting the best financing package is nearly as important as finding a home that meets your needs. In fact, determining how much you can afford before you begin your home search will save you valuable time in choosing the right home in the right neighborhood.
There are three factors to consider in figuring how much you can afford: your down payment, the mortgage you qualify for and closing costs.
Down Payment
Most loans require a down payment of between 3.5% (FHA) and 20% (conventional) of the home price. If you are unable to put that much down, there are still a couple of loan programs for you, but understand that the interest rate and closing costs may be a little higher.
Most lenders prefer that your monthly mortgage payment, including principal, interest, taxes and insurance, not exceed 28% of your gross monthly income. They also look for your total installment debt (regular scheduled payments of 6-months or longer), including the proposed monthly mortgage payment on your new loan, to not exceed 38% of your gross monthly income. They also look at a composite credit scoring service, usually called your FICO score. Scores over 700 are preferred by lenders. These are only guidelines, however, and you should discuss your specific circumstances with a loan officer to determine what you quality for.
Closing Costs
Closing costs typically range between 2 and 5 percent of your loan amount. These fees are due in cash at the time of closing or sometimes may be included in the loan. Your lender can provide a Good Faith Estimate of your total costs well before you contract to buy your home at varying price points. Asking the Seller to pay for some or all of your closing costs might be an option too – but never a given.
Taking the time to pre-qualify for a mortgage before you begin your home search puts you in a better negotiating position, because the seller is assured that the transaction will not be delayed while you secure financing. Most sellers will not seriously consider an offer unless it is accompanied by a Pre-Approval letter. Get pre-qualified with a local lender now.
