How Much Can I Afford?
There are two major factors that will determine how much of a house you can afford:
- The amount you are qualified to borrow; and,
- The size of your down payment.
Lenders take into consideration your gross monthly income and your existing debt payments when determining how much you can afford to pay each month. This number is called your “debt-to-ratio income” (DTI).
If you have an existing home, also factor in these considerations into your new home purchase:
- The equity in your current home.
- Selling costs (Example: Repairs or updating your current home may need)
- Closing costs (Example: Title Work; Conveyance Fees – costs associated with the actual closing of the property and transfer to the new Homeowner).
- The savings you can spend – applied to the new home purchase.
The best way to begin the home-buying process is to get pre-qualified (or pre-approved) with the lender of your choice. It’s quick, convenient, and you can complete the process on-line. Sellers in today’s market always want to see that a prospective Buyer of their home is pre-qualified or pre-approved (this shows them that you have the financial ability to purchase their home and that ability has been verified by a lender).
The following are the basic items a lender may require at the time you make a formal application for a mortgage loan:
- A copy of your Contract of Sale / Purchase Agreement or Building Agreement (complete with the address and legal description of the property).
- W-2 forms for the past two (2) years an original pay stubs for at least the last thirty (30) days showing year-to-date income or a statement from your employer confirming your earnings for the previous two (2) years.
- If self-employed, business and personal Federal Tax Returns for the past two (2) years plus a current financial statement.
- A ninety (90) day history of savings; checking; and/or brokerage accounts.
- Verification of twelve (12) months of rental; mortgage; or land contract payments.
If you are a new home buyer, be sure to ask your lender about FHA or VA payment assistance programs and as well as conventional loan mortgages. Again, getting pre-approved for a home loan is highly recommended so that you are searching for a property in the appropriate price range. Most Sellers will require a pre-approval letter from the Buyer’s lender before they will accept an Offer and sign a Purchase Agreement.