How Much House Can I Afford?
Purchasing a home is a process that opens up many possibilities as well as many questions. While everyone has their own idea of a dream home that they would one day like to own, their reality might be something much different.
For this reason, before you get started on the actual process of looking at homes, it is a good idea to find out exactly how much house you can afford. Doing your homework in the early stages of home buying can save you a great deal of frustration, time and money.
Things to consider when deciding how much house to purchase
While you might immediately think of your income as being a factor in the amount of house you can afford, it is not the only thing that you should take into consideration.
It’s true – you need to have a sufficient amount of steady income that is verifiable in order to obtain a loan for a mortgage. Since most homebuyers lack the liquid funds to pay for their home in cash outright, it is important to know exactly what your lending institution will be looking for when you apply for a mortgage.
Most financial institutions will only count money that you receive on a regular basis as part of the baseline of how much house you can afford.
If you are purchasing a home with a spouse or partner, their income can typically be used during this phase of the calculation. In many cases, you don’t need to count money such as child support as part of your income unless you want to do so.
Expenses and Debt
This category is nearly as important to creditors as your income is. If you have a high debt to income ratio, it will reduce the amount of house you are able to afford.
The types of items that fall into this category include car payments, insurance, credit card debt, utilities, student loans, groceries and the like.
Most lenders like to see your debts take up no more than 36 percent of your monthly income. This figure allows for ample funds to pay your obligations to the mortgage company as well as other creditors without fear of overextension and possible defaulting.
The amount of a down payment that you are able to put down toward the purchase price of a home makes a huge difference.
Your down payment amount is taken directly off of the purchase price of your home so you then need to qualify for a lower mortgage. The amount of down payment required depends on the type of loan you acquire but typically range from 5 to 3.5 percent.
You probably hear a great deal about your credit report in the media – and there is a good reason for this! Your credit history is an important tool that any potential loan officer will be extremely interested in seeing.
Not only does your credit report provide detailed information about the debtors and creditors that you currently have, it paints a picture of your financial habits that can clue an mortgage company into whether or not you are a good credit risk. (Quick Tip: How To Improve My Credit Score)
The Mortgage Process: A Brief Overview
Suffice it to say that the mortgage process takes time and effort. It might feel like there is quite a bit of paperwork that you need to gather together but most of it should be items that you have fairly handy – especially in this digital age where you can often access information almost instantly.
You will then just need to print it out and hand it over. Here is a brief overview of the steps you can expect during the process.
While many lenders require this step, it is often optional before you actually begin to look for a house. However, nearly all experts suggest that you take this step first – before you begin the legwork of touring homes.
In fact, there are many real estate agents that will not work with potential home buyers unless they have pre-approval letter in hand first. During this phase, you can expect your lending institution to ask you for the following items: pay stubs, your credit report, a copy of your most recent tax return, last two months of your investment and bank statements and your W-2s. (Tip: Difference Between a Mortgage Pre-Approval and Pre-Qualification)
Full Loan Application
This step kicks in once you have found the property you want and you are interested in moving forward with its purchase.
You will need to update any information contained in your pre-approval package that is more than 90 days old. In addition, be prepared to address any discrepancies that crop up on your credit report.
Your loan officer might also require documentation in connection to deposits into your bank accounts that are in excess of $1,000. It is at this stage that the full mortgage application will be completed by you and the loan officer.
Processing The Application
The next step involves a mortgage processor who looks over your loan application. In addition to ensuring that all the information on the application is complete and that the loan officer did not overlook anything, the processor will order an appraisal of the property you want to purchase, as well as a title search and its accompanying legal work, if necessary. This second step is an important one to ensure that everything is in place for the loan and that nothing is inadvertently missed.
Submitting The Application To Underwriting
When your financial institution receives the appraisal paperwork back and all is in order, it is time for it to be submitted to underwriting.
During this phase, the processor will file a report that is designed to unearth any fraudulent activity — if any such activity exists. Within this report – which often can encompass dozens of pages – both you and the seller will have their histories examined closely. The report will look at your background, as well as the background of the real estate and other property professionals that are involved.
The appraiser and any attorneys that are part of this real estate transaction will also have their backgrounds closely examined to rule out any fraudulent behavior. If anything of note comes back, the process will ask for more documentation to alleviate any concerns.
The Underwriter’s Role
Once your loan package is submitted to the underwriter, that person combs through it thoroughly to ensure that all of the required documentation is included. Each detail of the application is reviewed to make sure that all regulations and applicable laws are complied with.
While particulars might differ depending on the particular loan that you are seeking, all must meet the guidelines established by the state and federal authorities.
Knowing the process is half the battle when it comes to purchasing a home. Not only will you know how much home you can afford before you head out to search for properties, you will be informed as to the intricacies of the process as well. Clearing up this confusion can make the process much easier to undergo as you wait for your mortgage loan to be approved.