#273 - How Much Home Do I Qualify For?
Income, Debt, Down Payment, Closing Costs, Two Years Income Tax Returns, Assets & Liabilities, and IRAs. You want WHAT? Just what can I afford?
Buying a home in today’s marketplace is a bit intimidating, and your new home purchase is likely to be one of the most important decisions you’ve ever had to make. Usually it’s one of the single most valuable assets you’ll own.
Where to Start
Before you invest hundreds of hours searching, to avoid any heartbreak, if you find yourself unable to qualify for your dream home, sit down with a lender. Your lender can perform a simple verbal pre-qualification in about twenty minutes and a full-fledged pre-approval in about 5 days.
Pre-qualification not only allows you to focus your search in the correct price range, saving a lot of wasted time and frustration, but it can also give you an edge when competing with other offers on a home that you find. If a seller is deciding between two offers - yours which has been qualified and another unqualified offer - they are much more likely to pick yours.
Pre-qualification will also give you leverage when negotiating with a seller in a non-competitive atmosphere; it essentially makes you a cash buyer.
The amount of home that you qualify for will be determined by three key factors: Your down payment, your ability to qualify for a mortgage, and closing costs.
The Down Payment
Whereas a current homeowner can rely on equity from their home sale, a first time homebuyer is limited to the money they can save.
The days of having to put 20 percent down on a home are in the past, although putting a large amount of money down definitely makes it easier to qualify for a mortgage and to get the lowest interest rates available. With the various programs that are available today, you can put as little as 3 percent down on a home.
Qualifying for the Mortgage
There are two basic guidelines that lenders use to determine what size mortgage you are eligible for:
Your monthly mortgage payment of principal, interest, taxes and insurance (PITI) should not exceed 25 to 28% of your monthly gross income.
Your monthly housing cost (PITI) plus other long-term debt should not exceed 33 to 38% of your monthly gross income.
Specifically, most lenders will consider 4 key factors to determine your ability to qualify for a home loan:
This first element can include not
only your gross monthly income and secondary income (commissions, bonuses) but
also your history of employment, stability of income, education, even potential
for future earnings.