Pre-qualification for a mortgage is one of the first steps to take before you start…
We all have that dream home in our minds. Perhaps yours is a small ranch-style home. Or maybe you have your heart set on a large 5-bedroom modern build with an inground pool. Whatever your dreams for a home may be, we often have to start small and then work toward that dream. Direct Home Lending can help.
Of course, our dreams also change. We may choose a style that is our dream home, only to change our minds. Our preferences and tastes mature and adapt over time, so it’s only logical that what we want in a home would as well.
When you’re in the market for a new home, the first place to start is your budget. Understanding how much home you can afford is essential to the buying process.
Take a look at the tips below. Then head over to Direct Home Lending for a mortgage calculator, pre-qualification, and more.
First, the Down Payment
It’s a good idea to first think about the funds you have available for closing costs and a down payment. Some mortgages require you to place 20% down up front, but there are also programs with reduced down payment amounts.
If you’re able to put 20% down, you should; it will increase your purchasing capacity and reduce the overall monthly payment as well. However, it’s not uncommon to need to start lower, which is why options like the first-time homebuyer’s mortgage options exist.
Even with a reduced down payment, you still have closing costs; remember to account for the potential of that expense as you determine how much you can afford. On average, closing costs are 3% of the purchase price; they can be slightly higher or lower.
Consider Income & Expenses
As you are determining how much home you can afford, it is important to look at your current income and expenses. Don’t assume you will be making more in the future or that your expenses will go down. You want to base this number on your current style of living to be realistic.
There are tons of calculators out there that can help you. A pre-qualification process will also give you a recommendation of a range to stay within. Don’t be afraid to use these tools to help with your calculations.
Create a budget by working a house payment into it. Where do you stand with the anticipated payment? In general, the industry recommendation is that your mortgage payment be less than 28% of monthly income for the home.
Your total debt to income will also be analyzed and most lenders strive to keep you under 36%, although some might let you reach as high as 43%.
Plan for the Unexpected
Homeownership puts you in a whole new playing field for expenses. While you might be used to paying rent and utilities, you probably have not been responsible for your own maintenance needs before. You will want to be able to budget money to be set aside in case something occurs.
Here are some examples:
- New appliances or replacements
- HVAC care, maintenance, or replacement
- Septic tank maintenance
- Plumbing requirements
- Lawn care needs
- Water heater replacement
These are just a few things that homeowners commonly have to deal with. It’s better to be prepared than to find yourself in a bind when something does require your attention.
Important Details to Consider from Direct Home Lending
When you’re learning how much home you can afford, there are key aspects that should be part of the decision-making process. This includes your income, debt, expenses, savings, and credit. Each of these will play a role when it comes to getting a mortgage.
For example, your income is just one piece of the puzzle. However, your net income is ultimately what determines how much money you will have available to work with. Income has to cover the mortgage, other debt, utilities, expenses, and entertainment and grocery needs, too.
From there, we look at debts as well as expenses. These go together because your debts are an expense. However, not every expense is a debt, so keep that in mind. These are obligations that you make regular required payments to. They will come out of your income.
Your savings or reserves dictate whether you can afford closing costs or a down payment. Before you buy, you should spend some time building up reserves to be prepared.
And then your credit plays a part, too. This could impact the interest rate you receive on a mortgage or even your eligibility to borrow. Credit makes a difference in the end result of borrowing terms and qualifications.
Find a Calculator and Use Pre-Qualification
You know what plays into how much home you can afford, but now it’s time to put it all together. You should look at the numbers and compare them.
You can also take advantage of tools like a mortgage calculator or even a pre-qualification process. Both of these are designed to help you calculate a payment and figure out just what to expect for payments, costs, and affordability. They’re great resources to determine just where to get started.
Let Direct Home Lending Help
Once you have a handle on what you can afford, you can start looking for homes that meet your budget limitations and your style preferences. Take the time to find the right fit. When you’re ready to move forward or work through a pre-qualification process, Direct Home Lending is here to help. Our site has several tools and resources. We also offer 24-hour approval, so you don’t have to waste your time playing the waiting game.