Buying a new home is a big decision that involves a whole lot of smaller ones. Many people focus on the number of bedrooms or the quality of the kitchen appliances as they contemplate where they want to live.
Mortgage lenders use something called qualification ratios to determine how much they will lend to a borrower. Although each lender uses slightly different ratios, most are within the same range. Some lenders will lend a bit more, some a bit less.
Your debt to income ratio (DTI) is another way of calculating how much house you can afford and is a number your lender will take into consideration when evaluating your loan application.
To calculate your DTI, add up all your continuing monthly expenses, then divide that number by your MGI. Knowing this number is a good way for you to identify areas where you can reduce debt, such as paying down credit card balances.
The absolute minimum down payment you’ll need to purchase a home is 3% to 5% if you’re applying for a conventional loan and 3.5% if it’s an FHA loan. However, the ideal down payment is 20% of the home’s value. Less than this amount and you will have to add what is called private mortgage insurance (PMI).
Your credit score is an important component in your home buying journey. A higher credit score will qualify you for lower interest rates, so your first step is to check what your score is and see if there are ways of improving it. Check your score, and if it is close to a higher “bucket” see if you can improve it enough to qualify for a lower interest rate. You have a certain amount of money to spend on a new home purchase, so figuring out how best to use that money is important.
Consider all financing options and how they will affect your mortgage over the long run and choose the one that gives you the biggest savings over time.
Once you’ve made all your financial calculations, you can start to search for properties. Experts recommend limiting the listings you look at to those that fit your preferred budget and let your real estate agent know you aren’t interested in seeing properties above your price range. This way you can avoid the temptation of falling in love with something you may not be able to comfortably affor.