How do I know how much home I can afford to purchase?
Are thinking about purchasing a home but you need determine exactly how much home you can afford?Whether you are a first time home buyer or an experienced investor you want to make sure you are truly able to afford a home before you make a purchase.
Before you even begin looking at homes it is critical that you speak with a mortgage professional and determine how much you qualify for.You want to be prepared with a pre-qualification letter so when you do find a home, you are ready to make an offer.
I want to clarify that a pre-qualification is not a pre-approval.This is worth repeating.A pre-approval requires them to pull credit and gather the required documents to prove your financial situation.
Let us refer you to one of our mortgage partners so you can be assured to be given great care.A mortgage professional can typically conduct a 15-20 minute verbal interview over the phone and give you an initial pre-qualification to purchase.They will ask you questions about your current financial situation and what your plans are for the future.
Here are some things you need to know:
- Who will be on the mortgage and responsible for the debt?
- Social security numbers and birth dates are required.
- Will this be your primary residence, investment property or a second home?
- Employment history
- Monthly household income
- Any additional income (child support, alimony, interest income, etc.)
- What are your assets?(How much money do you have in all of your checking, savings, stocks & bond, cd's, 401k and retirement accounts)
- How much do you plan to use as a down payment?
- What are your liabilities or debts?(any mortgage payments, car payments, credit card or revolving credit accounts, student loans, child support, alimony payments etc.)
You will eventually be required to submit the following so you may want to be prepared:
- 2 years tax returns
- Last 2 months bank and financial statements
- Last 2 months pay stubs
This information will help the mortgage professional to calculate your housing obligation ratio (HOR).This includes your monthly mortgage payment of principle, interest, taxes and insurance (PITI).This should not exceed about 25% to 28% of your monthly gross income.
Your total monthly housing costs (PITI) plus any other long term debt makes up your total obligation ratio (TOR).Most banks want your TOR not to exceed 34% to 40% of your monthly gross income.
Be open and honest with the mortgage professional and give them a true picture of your financial situation.You will have to provide documents to support the information you give them.
The Down Payment
You are typically required to put a down payment on a home.Even if you were to do 100% financing, you will have closing costs.The closing costs that the buyer is responsible for mainly associated with financing costs or cost associated with obtaining a mortgage.
Aside from the down payment it is customary for the buyer to put down an earnest money or good faith deposit when making an offer.There is no set amount but it is typically in relation to the purchase price.The earnest money will range anywhere from $1,000 to $5,000 on an average real estate transaction.This money does go towards your down payment.
Some first time homebuyer programs, such as FHA will allow a portion or all of the down payment to be a gift.There are also government subsidized grants programs such as the SHIP that offer down payment assistance.
Closing costs are the cost charged for obtaining a mortgage.Closing cost typically range between 2% and 6% of the loan amount.These costs include:
- Loan origination fee
- Loan application fee
- Loan discount or pre-paid discount points
- Appraisal fee
- Credit report
- Processing fee
- Underwriting fee
- Wire transfer fee
- Closing fee (title company)
- Document preparation fee (title company)
- Notary fees (title company)
- Title insurance fee (title company)
- Title exam fee (title company)
- Title endorsements (title company)
- Recording Fees (government)
- Intangible tax on mortgage (government)
- Tax stamps on the deed (government)
- Prepaids and reserves (mortgage interest, mortgage insurance and hazard insurance)
For cash transactions, the only closing costs you will have are title fees which is typically around $300 - $600.
I am pre-qualified, what next?
Once you get pre-qualified you can begin looking for homes.Just try to be realistic and stay within a comfortable price range.You will typically make payments for the next 30 years so take this seriously.
Once you find a home that fits all of your needs, it is time to make an offer. You will need you pre-qual letter with the offer to show that you are able to purchase the prospective property.
Still have questions?
Obviously the financing end of the real estate is the most complicated and confusing.We are here for your questions.Ian is a licensed mortgage broker and is very knowledgeable about mortgages and financing options.