Getting A Mortgage You Can Afford
Buying a house is something that requires you to determine just exactly what you can comfortably afford. The last thing you want is to buy a new home and then find that you’re “house poor” or worse, unable to make your monthly payments. This would not fall into the “mortgage you can afford” category!
Fortunately, the lending process is designed to help mitigate risk for both a buyer and seller. A key part of this comes down to a healthy review of your “three C’s” of Credit which are: Character, Capital, and Capacity. Ultimately, it is a combination of the three C’s that influence your credit score.
Speaking of that, keep in mind that the FHA (Federal Housing Administration) offers mortgages to people that meet specific credit requirements including a credit score of 500 or greater. Before you start your home loan search, it is important to review your credit report for accuracy. It is also helpful to be mindful of what your credit scores are as these will help determine what mortgage option is best for you.
Equifax, Experian, and TransUnion report scores on a scale of 300 to 850.
Once you are certain that your credit history is accurate, you are ready to figure out just exactly what you can afford. In this process, you will work through the following:
- Determine your monthly cost of housing: It is pretty standard for a majority of the home lenders to prefer that you won’t be exceeding a threshold of 33 percent of your gross monthly income to cover your monthly mortgage payments. Your monthly cost of housing includes the total of your mortgage rate, insurance, taxes, and any associate maintenance costs. If that number exceeds 33%, you should probably look at a different property.
- Make certain you can afford the home: This is an opportunity to comb through your pile of bank statements and come up with a budget that works for you and your family. After you have calculated how much money is left over after you have covered housing payments and other bills, you’ll have a basic idea of what cash is left over for savings and general comfort.
- Review your debt-to-income (DTI) ratio: No one likes to be reminded of their debts but it is important not to lose sight of it. When you review your DTI ratio, add up all of your monthly debt payments. This includes your monthly credit card bills, mortgage payment, any auto loans, and also student loans! Take that number and then divide it by your gross monthly income. If your DTI ratio is at or above 36 percent, you may need to find ways to aggressively pay down your debt before buying a home.
When you successfully dig in to the three important data points above, your mortgage specialist will be able to quickly help determine what mortgage rate you will most likely qualify for. This will also help determine if you will be subject to any lender overlays.
After you iron our the debt side of things, it is time to figure out what sort of equity you can start off with. This means determining just how much you can afford to put down (your down payment). Depending on your loan choice, down payments may be as high as 20%. Unlike conventional loans, FHA mortgages are appealing because they typically require much lower down payment amounts.
In fact, the FHA (Federal Housing Administration) may offer a down payment option that is as low as 3.5 percent even to those who may not have the best credit. For a down payment that is as low as that, credit requirements are typically more stringent though still relatively much more lax than with conventional loans. While you may qualify for a FHA loan with a lower credit score, expect a cutoff of 580 or higher.