You’re ready to start shopping for a new home, but you are asking the question; How much of a mortgage can I afford? Before you fall in love with a home, take a crucial step in finding out how much of a loan you can expect to be qualified for.
Look at your lifestyle
Buying a home is perhaps the single biggest investment you’ll make in your life. You don’t go into this commitment lightly. Understanding your financial situation is a strong step toward becoming a happy, responsible homeowner.
First things first. Look at your current situation.
What’s your employment status?
Lenders prefer customers who can demonstrate job security. If you’re thinking about buying a home, avoid a job change before you contract to buy a home.
Is your job secure?
Many people have gone through a tough time during the pandemic, with employers downsizing or closing their doors altogether. You should have confidence that your job is secure before taking on the debt of a mortgage.
Will your income change soon?
If you expect a raise or bonus in the near future, you might be better off waiting to determine how much mortgage you can afford. Don’t place your bet on a “maybe”. Lenders will want proof of income.
Create a budget.
Make a list of all your monthly living expenses: rent, utilities, loans, credit cards, phone, cable, and internet. Then itemize what you spend on food, entertainment (including streaming services), pet care, shopping, and travel. If you need to tighten your budget, this second group is probably the place to find room to cut back.
Calculate your amount of debt.
Lenders look at your debt-to-income ratio. Your total debt should not go over 40% of your total income to qualify for a mortgage with a competitive rate. If your debt-to-income ratio is higher, try to pay down some of the debt before applying for a mortgage. It could make a difference in how much you qualify to borrow.
Manage your credit report.
This is a big factor in determining your creditworthiness for a home loan. Your credit score tells a lender about your borrowing and repayment history—how much you owe, how much credit is available, and whether you pay your bills on time. The higher the credit score, the better the interest rate you can expect to get.
You can get a free copy of your credit report every year by visiting AnnualCreditReport.com. Then, talk to a lender to review your report and find out if you need to make improvements to put yourself in a better borrowing position.
Tips to improving your credit score.
Don’t max out your credit.
Credit utilization—or the amount of money you spend compared to your available credit—makes up 30 percent of your credit score. For example, if your credit card has a limit of $1,000 each month and you only spend $200 each month, your credit utilization is 20 percent. Credit experts recommend only using up to 50% of your available credit. This shows lenders that you know how to responsibly handle your credit. Maxing out your card might sound like no big deal but doing so could signal to lenders that you’re not responsible or that you’re in financial trouble.
Be wary of opening up store credit cards.
They might sound like an easy way to save some money, especially if you were planning on buying store products anyway. But new credit makes up 15% of your credit score, so opening that new account could harm your credit. Avoid opening too many credit accounts at the same time. It’s recommended to have two revolving loans (such as credit cards) and one installment loan (such as a mortgage or car loan) to establish good credit.
Don’t spend more than you can afford.
Just because you can use credit doesn’t mean you should. Making your minimum payments is great but having the ability to pay off your credit card monthly will save you tons of dollars on interest and help to increase your score.
If you do use credit, use it responsibly.
Making timely payments is a great way to build your credit score. In fact, your bill-paying history is the most important factor in your credit score, as it shows that you manage your money well and are likely a responsible borrower.
Determine your down payment.
First of all- what is a down payment?
It’s the percentage of your home price that you will pay upfront. Your downpayment represents the initial amount of equity—or ownership—that you will have in your home.
So, if you’re putting 10% down on a $200,000 home, your down payment will be $20,000. Sound like a lot of money? The good news is that many loan programs allow you to put much less than 10% down on a home.
Each loan program will have its own downpayment requirements:
Backed by the Federal Housing Administration, the FHA requires as little as 3.5% down.
Backed by the U.S. Department of Veteran Affairs, these loans are for qualified current, retired and reservist military members (and some surviving spouses) and typically do not require a down payment for homes that do not exceed the VA limit.
Backed by the U.S. Department of Agriculture, these loans are for rural and suburban home buyers and start at 0% down.
While down payment requirements for Conventional loans differ from lender to lender, we offer Conventional loans starting at just 3% down. This amount may increase depending on your home’s purchase price, the purpose of purchasing the home (primary residence, secondary residence/vacation home, or investment property), your credit score, etc.
While these loan programs may not always require a 20% down payment, you will be required to pay private mortgage insurance if you put less than 20% down—unless you are using a VA Loan. The private mortgage insurance will protect the lender on their investment in case you are not able to make your monthly payments, and in some cases can be removed once you reach a certain amount of equity in your home.
So how much should you put down?
This is completely dependent on your situation. Your loan officer can help ask all the right questions to determine what makes sense for you. Just as a rule of thumb, for every $10,000 you put down, you’re only saving about $50 per month on your mortgage.
While some buyers want their monthly payments to be as minimal as possible, others may feel more comfortable paying a little more each month knowing that they have wiggle room in their savings account.
Reasons to become a homeowner?
Customize and Make Upgrades as You See Fit
When you own your home, you’re free to paint the walls, decorate in your own style, make upgrades or renovations as you see fit, or put a fence up for your dog. (Did you know: 33% of millennial homebuyers say the decision to purchase a home was driven by their dog. Compare that to 25% who cited marriage as their primary reason to buy a home.)
Rates Are Projected to Stay Low
According to the Mortgage Bankers Association, Fannie Mae, Freddie Mac, and other major industry sources, interest rates are expected to remain low in 2021. Freddie Mac predicts that rates will average at 3% for the year. Low rates mean you pay less in interest, allowing you to expand your budget and get more bang for your buck. Buying a home while rates are low could save you thousands of dollars over the life of your loan.
The Housing Market Remains Healthy
Unlike many other industries, the housing market has remained strong throughout the Coronavirus pandemic. In fact, between people fleeing dense cities, families moving to homes that better suit their needs, a telecommuting opening more living options, 2020 was one of the busiest years we’ve had on record.
Grow your Equity and Borrow Against It
Money paid toward rent goes into the pockets of your landlord. However, when you purchase your own home, a portion of your monthly mortgage payment, known as the principal, will allow you to build equity in your home. Later down the road, you can borrow against the equity in your home to pay for renovations, college tuitions, weddings, debt, or anything else that you would like.
Real estate consistently appreciates in value, meaning that your home is acting as an investment. On average, home prices have risen from 3-6% over the last 20 years, according to data analytics company Black Knight. Not only has buying a home proven to be a sound financial investment, but it also provides stability for you and your family over the years.
Provide Stability for You and Your Family
When you purchase a home, you’re not only making a smart investment, but you’re also providing a stable place for you and your family to live. No need to worry about rent increases, or having your rental sold from under you. So, whether you plan to have fur babies, or children of your own, raising them in a home that you own can provide them the stability they need to flourish.
Buying in Raleigh?
Are you thinking about a new home in Raleigh? New Home Inc presents a unique approach to homebuilding. Our extensive research into what homebuyers want right now has provided valuable insight into the way we design our homes—the ”Future-proof” approach. When you’re looking toward a long-term investment, be sure you’re starting with a builder who’s also visionary. Talk to us at New Home Inc about our new homes for sale in Raleigh NC.