How Much Can You Afford?
Understanding how much you can afford is one of the most important rules of home buying. Depending on your individual situation, your budget can affect everything from the neighborhoods where you look, to the size of the house, and even what type of financing you choose.
Prequalification vs. Preapproval
One of the best ways to determine your budget is to have your lender prequalify you for a loan. Prequalification is only an estimate of what you'll be able to afford, while preapproval is a more formal process where a lender examines your finances and agrees in advance to loan you money up to a specified amount.
What factors are important to lenders?
Lenders use several criteria to determine how much money they'll agree to lend, including;
• Your gross monthly income
• Your credit history
• The amount of your outstanding debts
• Your savings--or the amount of money you have available for a down payment and closing costs
• Your choice of mortgage (i.e. 30-year, FHA, etc.)
• Current interest rates
Lenders also use your financial information to figure out two, very important ratios: the debt-to-income ratio and the housing expense ratio.
• Debt-to-income ratio
Many lenders use a rule of thumb that the amount of debt you are paying on each month should not exceed more than 36 percent of your gross monthly income. FHA loans are slightly more lenient.
• Housing expense ratio
It is generally difficult to obtain a loan if the mortgage payment will be more than 28 to 33 percent of your gross monthly income.
Down payments make a difference
If you can make a large down payment, lenders may be more lenient with their qualifying ratios. For example, a person with a 20 percent down payment may be qualified with the 33 percent housing expense ratio, while someone with a 5 percent down payment is held to the stricter 28 percent ratio.
For more information, or for answers to any of your questions, contact Hilton Realtors at (417) 882-9936