Right now, you are likely asking “How much house can I afford?” Keeping some pointers in mind can help you to arrive at a suitable and reasonable answer.
Start with Mortgage Calculators
Ultimately, you want to sit down with a representative from the lending agency to discuss the details of your mortgage. Still though, you can get a sense of where you might land by using online mortgage calculators. Opt for one from a reputable source. For example, your bank might offer a mortgage calculator. You’ll input financial information about yourself and the person with whom you are purchasing the house, if applicable, and see what the generator says you can afford. Keep in mind that you should look at this number as an estimate that helps you to start getting a sense of what you can afford as opposed to an absolute truth. (Related: Are Newly Constructed Homes Better Than Old Homes?)
Assess Your Down Payment
The amount of down payment you can make is going to play a large role in answering your question of “How much mortgage can I afford?” The down payment is how much money you pay for the house upfront, which reduces the amount of money that you need to pay toward the mortgage each month. Generally, the more of a down payment you can make, the more expensive of a house you can purchase. The down payment can play a particularly crucial role if you have poor credit scores, which could stifle your ability to obtain a mortgage with high monthly payments.
Review Your Credit Scores
Your credit scores play a notable role in this process. As you’re preparing to purchase a house, you need to know where your scores stand. In fact, you should really get a copy of your scores well in advance of setting out to buy a house. By doing so, you could improve your scores before you actually go to get approved for the mortgage. Your credit scores can affect the amount of mortgage that you get and how much you pay each month in a few ways. A low credit score, for example, can pose a risk to lenders. If you have tons of credit card debt and do not pay your bills on time, the lending entity needs to question if you will have the ability to pay your mortgage. Your credit score can also affect the interest rate that you get. A lower credit score is likely going to mean a higher interest rate. Interest is the amount of money that you pay each month on top of the principal mortgage. (Related: Six Tips for First Time Home Buyers)
Calculate Your Monthly Income
In addition to reviewing your proposed down-payment amount and your credit scores, lenders are also going to look at your monthly income. They need to make sure that you have the necessary funds to pay the mortgage back. Take a look at your total household monthly income. Keep in mind that you will likely also need to show your job history too. In other words, lenders want to see that you have a history of getting regular payments from a job. Even when you are bringing in money, if you have jumped around from job to job, the lenders may question if you will have the ability to pay the loan in the future.
Better Your Finances
If you want to get a bigger mortgage, you may then need to better your finances. As you have learned, lenders are going to look at your down payment, your monthly income and your credit scores. As far as the first two elements go, you could look into taking on some part-time work. Keep in mind that saving up money can take time and that you want to show a longevity at the job. Even in the event that you bring in a significant portion of money during your first month at the job, you may need to wait a little bit longer to improve your odds of getting a higher amount of mortgage. As far as your credit scores go, you need to take a look at what is making them low. Perhaps you have too much credit card debt. What you could consider is taking out a loan to pay off the credit cards so that you are not drowning in interest. On the other hand, you might have a low score because you constantly forget to pay your bills on time. Look into automatic payments so that this issue does not keep occurring. Do remember that it could take some time for your credit scores to update.
Obtain a Pre-Approval
Once you have your finances in order, you are ready to work on obtaining a pre-approval from a lending entity. Keep in mind that this process can take some time. You will need to submit documentation, and you might have to make a few phone calls at parts of the process too. Ultimately, you will find out how much of a house you can afford. Now, you might wonder why you should bother with a pre-approval or even what a pre-approval is in the first place. A pre-approval means that you are getting approved for a certain amount of mortgage before you make an offer on a house. This step is a smart one because it can narrow down the options for you. In other words, you don’t want to see a house, fall deeply in love with it, go to obtain an approval and find out that doing so is financially impossible.
Most pre-approvals come with an expiration date. For example, perhaps you will have a set number of months until the pre-approval expires. At that point, you would need to go for another pre-approval. While the amount for which you are approved might not drastically change in that time period, it could. Also, you would have to go through the entire process all over again. Therefore, while you might be eager right now to see how much of a house you could afford, you are better off waiting until your financial situation is in order before doing so. (Related: How to Win a Bidding War When Buying a Home)
Don’t Necessarily Take the Full Amount
Getting a pre-approval is exciting. In fact, you might be shocked at the amount of money that the lender is willing to provide you. What you must remember is that you are being given the uppermost figure. By no means are you required to spend that amount of money on a house. In fact, it is advisable in many cases that you opt for a lower amount of loan. You do not want to stretch yourself so thin that all of your money is going into the mortgage payments.
One way to figure out how much of a loan you can actually afford to take is to practice setting aside a certain amount of money. For example, you could calculate what your monthly payments might be for the mortgage. Then, see if you have the ability to actually set aside that amount of money for a month or so. Do keep in mind that if you are currently paying rent, you would not have that cost anymore once you have the mortgage. In other words, you would want to account for that factor when you are evaluating how much money you can put aside each month.
Remember Taxes and Mortgage Insurance
You might think that you need only enough money to pay for your mortgage and the interest on it. However, other expenses absolutely come into play. Take into account how much the taxes are in the area where you want to live. Remember that taxes can change. In the event that you can barely afford the taxes now, you could very well lose the ability to do so if the taxes increase. You may also need to pay for mortgage insurance. Add all of these expenses up when you are trying to see if you can set aside the appropriate amount of money on a monthly basis.
Add in Other Expenses
If you are currently renting, you might get certain expenses paid for with your rent. For example, it’s possible that water, electric, heating and cooling are included in your rental fee. When you own a home, you must pay for all of those elements by yourself. If you are currently living with your parents and have never had the expenses associated with living on one’s own before, you are likely in for an even bigger supplies. Make a list of all of the new expenses that you will have, such as purchasing groceries and paying for an internet and cable package. You may also be taking on car insurance or your own cell phone bill for the first time. Make sure that you can afford the mortgage with these expenses too.
Consider Maintenance and Surprises
Owning a home means that you need to maintain both the exterior and the interior. Doing so costs money. Also, you never know what issues are going to pop up with a house. If a pipe bursts, you need to take care of it. If the heating system has an issue, you must fix it. When the driveway is all cracked, repairing it is necessary for safety. You need money set aside to cover the costs of both these expected and unexpected situations as well. (Related: Three Easy Trick to Avoid Buying the Wrong Home)
As you can see, you have to take many factors into account when you are thinking about getting a mortgage and wondering how much you can afford. After all, purchasing a house is a huge move and likely the priciest one of your existence.