Financing Your Home Purchase
Selecting the best financing package is nearly as important as finding a home that meets your needs. In fact, determining how much you can afford before you begin your home search will save you valuable time in choosing the right home in the right neighborhood.
There are three factors to consider in figuring how much you can afford: your down payment, the mortgage you qualify for and closing costs.
Most loans require a down payment of between 3 and 20 percent of the home price. If you are unable to put that much down, there are still plenty of loan programs for you, but the interest rate and closing costs may be a little higher.
Most lenders prefer that your monthly mortgage payment, including principal, interest, taxes and insurance, not exceed 28% of your gross monthly income. They also look for your total installment debt (regular scheduled payments of 6-months or longer), including the proposed monthly mortgage payment on your new loan, to not exceed 38% of your gross monthly income. They also look at a composite credit scoring service, usually called your FICO score. Scores over 700 are preferred by lenders. These are only guidelines, however, and you should discuss your specific circumstances with a loan officer to determine what you quality for.
A credit report is ordered to verify your debt repayment habits, outstanding debt balances and available credit. Assets are also reviewed, including checking and savings account balances, CDs, stocks and bonds, etc.
Avoiding any late payments on credit accounts and limiting your credit purchases helps keep your credit report in good standing. If you have items on your credit report that could negatively influence your ability to secure a mortgage, be prepared to explain each situation to your lender in writing. You should also consider delaying major purchases until after you’ve moved into your new home.
Closing costs typically range between 2 and 5 percent of your loan amount. These fees are due in cash at the time of closing or sometimes may be included in the loan. Your lender can provide a Good Faith Estimate of your total costs to buy well before you contract to buy your home.
Taking the time to pre-qualify for a mortgage before you begin your home search puts you in a better negotiating position, because the seller is assured that the transaction will not be delayed while you secure financing. If you would like assistance in determining how much house you can afford or learn about financing options, please contact our office for more information.
Curious about your potential mortgage? Try our handy Mortgage calculator.