Almost everyone has a picture in their mind of what their dream home would look like. They know the color that they would paint each room and what appliances they want in the kitchen. They even know what kind of furniture they'd like to furnish each room with. However, when it comes to knowing just how much they can comfortably afford, the jury is still out.
Therefore, when considering what will be perhaps the largest purchase you will ever make, you should consider these three questions:
- How much money do you have saved for a down payment and closing costs?
- Based upon your income, what loan amount will you be approved for?
- What other debt obligations do you have?
Down Payment Assessment
For most traditional mortgage loans, you will need to save approximately 5 percent to 20 percent of the total cost of the home. For example, if the price of the home is $200,000, you will need to save between $10,000 and $40,000 for your down payment. This amount does not include other closing costs.
How much you are required to put down is based upon many different factors. If you have good credit you may be extended more favorable terms and thus, be eligible to put down less. The lender may offer special incentives. You may also ask the seller to absorb closing costs and provide some assistance with the down payment. Additionally, there are other down payment assistance programs that may help reduce your down payment, such as first-time homebuyers or veterans' assistance programs.
If you don't have that kind of cash lying around there are some other options you should consider. You may be able to increase the amount of the loan to cover the cost of the down payment. There are programs to consider for police officers, military and other special criteria. You should consult with your real estate professional or lender to find out more.
You should also consider The Community Reinvestment Act (CRA), which requires banks to offer mortgage products to people with income levels below what is normally required. Also, if you are a first-time home owner, there are down payment assistance programs you may qualify for that will reduce the amount of money you need for a down payment. To find out more about the programs, visit the U.S. Department of Housing and Urban Development (HUD) website at: www.hud.gov.
What Should Your Mortgage Payment Be?
No matter how nice your lender may be they are not in the charity business. They are looking to make a profit. They do this when you pay your mortgage. Therefore, they work hard to qualify you for the right amount. The general rule is that you should not spend more than 28 percent of your gross income on your mortgage principal, interest, taxes and insurance (also referred to as PITI for short). Therefore, if your annual household income is $55,000, lenders will calculate your payment at $15,400 or $1,283 a month.
Debt Analysis
Assuming you have passed the mortgage test and your mortgage is at 28 percent of your gross income or lower, the lender will scrutinize your debt. They will want to know about everything you owe. It really doesn't matter if you pay your bills on time; their goal is to ensure you are not overextending yourself. Even if you have enough income to cover your mortgage payments, if your debt is too high you can still be denied for the loan if your PITI goes above 35 percent of your total income. Let's again assume your annual income is $55,000. If your regular debt payment including PITI is $19,250 or $1,604 a month, you should be able to qualify. However, if your debt payments go above 35 percent you may qualify for less of a loan.