Want to know how much home you can afford? When you’re considering buying a home, it’s important to know what price range of homes you’re realistically able to buy first.
First of all, among other things, the three main factors that will determine how much home you can afford are your income, your credit score, and the current mortgage interest rate. On this page, you’ll find some tips and pointers about the home financing process and qualification requirements.
If you’re like most people, buying a home is will be the largest financial transaction you ever make so it’s important to pay attention to the home loan details to help you make the right decisions… the first time.
Hopefully the real estate agent you choose to choose to work with will explain the different home financing and mortgage options available as well. Between a professional real estate broker and good home loan officer, the process should be efficient, fun, and rewarding. Search for homes Now!
The First Step…
Let’s face it, financing a home isn’t as easy as it used to be. Gone are the days when you could walk in to a lender and sign for a loan based on your credit score alone… ah the good ol’ days!
That’ s why I recommend that my home buyers first apply for a home loan and get pre-approved. It’s important to know how much you can actually borrow before getting too crazy about looking at homes. I also included a pre qualification checklist link at the bottom of this page.
Understanding how pre qualifying will help you as a home buyer:
- Generally, interest rates are locked in for a set period of time. You will know in advance exactly what your payments will be on offers you choose to make.
- You will know exactly how much home you can afford so you won’t waste your time, the seller’s time, or your agent’s time offering on homes out of your price range.
- When it comes down to you an another offer, you could be the one the seller’s choose if you have a pre approval for a home loan and the other buyer does not.
- It shows the seller that you are not only willing to buy their home but able.
- The seller may choose to make concessions if they know that your financing is secured. You are like a cash buyer, and this may make your offer more compelling to the home seller.
- You can select the best loan package before you have a home picked out so you won’t be under pressure.
How Much Home Can You Afford?
There are three key factors to consider when looking into home financing and qualifying for a home loan:
- Your time on the job and income stability.
- The amount of money you have for a down payment.
- Your credit score
- The current mortgage interest rates
- The amount of closing costs associated with the type of home loan you are obtaining.
Down Payment Requirements. Most home loans today require a down payment of between 3.5% and 5.0% depending on the type and terms of the loan. If you are able to come up with a 20-25% down payment, you may be eligible to take advantage of special fast-track programs and possibly eliminate mortgage insurance which saves you money every month. Time On The Job.
Most real estate lenders are going to want you to have seasoned employment or be able to prove income if self-employed. If you are a W-2 wage earner you’ll probably need a minimum of 6 months on the job (12 months is better) or be in the same type of profession as your past employment.
Self employed buyers will need to show 2 years tax returns among other proof of income requirements. Your Credit Score. Yep, your credit score still is a major factor when qualifying for home financing. Your mid-score is also a factor the bank will use to determine your financing terms (interest rate and costs).
Good credit score (over 700 mid) you’ll get a good interest rate, lower scores can still qualify but may not have as attractive terms as a home buyer with a higher credit score. Closing Costs.
Keep in mind, you will be required to pay fees like loan processing, admin, prepaid items, appraisal cost, and other usual buyer’s closing costs. These fees must be paid in full at the final settlement (closing) unless you are able to include them in your financing or get the seller to agree to pay a portion. Typically, closing costs will be around 2.5-3% of your mortgage loan.
Home Financing… Understanding the qualifying formula
Most lenders require that your monthly payment range between 25-28% of your gross monthly income and will include:
- The principal on the loan (P)
- The interest on the loan (I)
- Property taxes (T)
- The homeowner’s insurance (I)
- and in some instances Mortgage insurance (MI)
Your total monthly payment (PITI) and all other debts from revolving credit accounts and installment loans should range somewhere between 33-38% of your gross monthly income. These are the key factors that will determine your ability to secure a home loan: Credit Report, Assets, Income, and Property Value.
Home Financing | What is Title and Escrow?
Title and escrow is where it all comes together. Once we have been formally approved for home financing and all conditions to the sale have been met, this is where you sign your closing papers to finalize the transfer of ownership. It is the title company’s job to search and ensure clean title.
An escrow account is a neutral depository where your funds and your bank’s funds actually change hands. Escrow is also the place where your earnest money will be held (in most cases). Expenses will also be settled through escrow for the property such as pro rated taxes, assessments, property insurance, or mortgage insurance premiums, etc.
Actually, most buyers choose to include impounds with their payment. What this means if you will pay one-twelfth of the annual amount of these items each month with your regular mortgage payment. When the bill is due, the lender will pay them from your impounds account.
Keep in mind, it may be necessary to pay enough into the account to cover these amounts for several months so that funds will be available to pay them as they come due. Please call or send me an email today if you need help finding a good real estate lender to help you qualify for home financing. I’m always here to help. Troy Schuyler- Roseburg real estate broker. 541-643-1131