By Ellise Walsh
It’s a good idea to know how much house you can afford before beginning the search for your dream home. It would be a waste of your time as well as that of your real estate agent to go and start looking at every home that strikes your fancy. Realistically, there is a maximum cap on the amount you can afford to spend on a home, and the amount a bank will be willing to loan you for the purchase of a home. Getting pre-qualified for a mortgage loan will actually help to save you time in the long run, because it will help you to narrow down your choices.
You might want to consider getting a basic idea of your own regarding how much you can afford before you make an appointment to see a lender. One general rule of thumb states that you can afford a home that is worth twice your annual income. In some cases, this may not be entirely accurate, however. Especially if you have a large amount of debt or you are planning to make a larger than normal down payment on the home. Another factor to take into consideration when thinking about how much house you can afford is the number of years you are willing to finance a loan. The monthly mortgage payments on two homes that cost the exact same amount will be completely different on a 15 year loan and a 30 year loan. The 15 year mortgage loan payment will be higher than the 30 year mortgage loan payment, but will be paid off sooner. The question you must ask yourself is whether you are willing and able to pay more money for less amount of time or less amount of money for a longer period of time.
There are a number of loan calculators available online today that can pretty much do everything from tell you how much a mortgage payment will be on a specifically priced house to how much you may be able to qualify to borrow. Keep in mind that the figures reported back to you on these calculators are not written in stone. You won’t be able to hold a lender to these figures because underwriting guidelines vary from one bank to another. This type of research will keep you from being surprised when the lender gives you your maximum figure, however.
Another benefit to taking the time to get pre-qualified for a mortgage loan is that when you do begin searching for a home, you will be in a better position to make an offer. Sellers want to sell their home and move onto the next phase of their lives. They don’t want to waste their time with would-be buyers who may or may not be able to come up with the necessary financing to close the deal. Being able to provide a pre-qualification letter from a bank will go a long way toward getting your offer accepted; particularly if there are competing offers.
For the most part, lenders will want some basic information from you in order to pre-qualify you for a mortgage loan. Depending upon the lender, they may need very specific information. Generally, however they will take a look at your income and your debt to income ratio. These two items typically determine the limit on the amount of money you will be authorized to borrow. Most guidelines call for a debt to income ratio of no more than 41% and a maximum house payment of no more than 29% of total gross income. Each lender may adhere to slightly varying underwriting guidelines, but these are average for the mortgage industry.
Another factor that may be taken into account when determining how much money you can borrow to purchase a home; is how much money you can afford to put down on the home. Most lenders also have guidelines on the maximum percentage of a property they will agree to finance. In some cases, that percentage is 100%, but in others it may only be 95% or 97%. While this may sound like a lot, those 3 to 5 percentage points can be a big difference on a luxury home in the amount of money you will be required to place as a down payment.
Keep in mind that the pre-qualification letter does not guarantee you will get the loan. The process of getting approved for a loan and actually closing a mortgage loan normally requires several steps and contains a variety of guidelines that must be met. Even if your income and credit history are satisfactory enough to get the loan approved, the property must be certain guidelines as well.
Ellise Walsh
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