How Much Home Can I Afford?
You need to first determine how much you can afford: Depending on your individual situation, your budget can affect everything from the cities where you look, to the size of the home, and even what type of mortgage loan you choose.
Keep in mind, however, that mortgage lenders will look at more than just your income to determine the size of the home loan. Likewise, you may find that there are some creative financing options that can help increase your buying power.
Mortgage pre-qualification vs. mortgage pre-approval: One of the best ways to determine your budget is to have your mortgage lender prequalify you for a mortgage amount. Mortgage pre-qualification is different from mortgage pre-approval, because it is only an estimate of what you’ll be able to afford. On the other hand, mortgage pre-approval is a more formal process where a mortgage lender examines your finances and agrees in advance to mortgage loan you money up to a specified amount.
Mortgage lenders will take into consideration several factors when determining you mortgage loan amount: These include:
- Your gross monthly income
- Your credit history
- The amount of your outstanding debts
- Your savings, or the amount of money you have available for a down payment and closing costs
- Your choice of mortgage (i.e. 30-year fixed rate mortgage, 15-year fixed rate mortgage, FHA loans, etc.)
- Current interest rates
Two important ratios your mortgage lender will consider: The debt-to-income ratio and the housing expense ratio.
Debt-to-income ratio: Many mortgage lenders use a rule of thumb that the amount of debt you are paying on each month (car payment, student loan, credit card, etc,) shouldn’t exceed more than 36 percent of your gross monthly income. FHA loans are slightly more lenient.
Housing expense ratio: It is generally difficult to obtain a loan if the mortgage payment will be more than 28 to 33 percent of your gross monthly income.
Your down payment will make a difference: It’s always best make a large down payment because mortgage lenders may be more lenient with their qualifying ratios. For example, a person with a 20 percent down payment may be qualified with the 33 percent housing expense ratio, while someone with a 5 percent down payment is held to the stricter 28 percent ratio.
The Arjani Group will help you reduce your closing costs: Through negotiation, some sellers may agree to pay all or most of your closing costs (for example, if you agree to meet their full asking price). If you choose to try this, make sure to ask your Arjani Group agent for advice.
Special mortgage loan programs are available: Many local governments have special loan programs designed to help first-time homebuyers. Mortgage loans may be available at reduced interest rates, or with little or no down payments. Check with your Arjani Group agent or mortgage lender for details.
There are several mortgage types you can choose from: Some homebuyers choose Adjustable Rate Mortgages (ARMs) because of low initial interest rates. Others opt for a 30-year mortgage because they have lower monthly payments than a 15-year mortgage. There are significant differences between different loans, so make sure to discuss the pros and cons of different loans with your Arjani Group agent or mortgage lender before making a final decision.
Contact the Arjani Group Today!
To learn more about home financing, or to schedule a private showing of any home found on our website, feel free to call us today @ (650) 331-2993. We appreciate your stopping by and look forward to speaking with you!