The standard rule of thumb used to determine how much of a home you can afford to buy is one that costs up to two and one-half times your annual gross income (gross income is the amount you make before taxes are deducted). If you are buying a home with a co-borrower such as a: spouse, parent, child over 18, partner/companion, a family member, etc. you can figure your co-borrowers annual gross income too when deciding how expensive a home you can buy. Keep in mind your co-borrowers debt's and credit history also will determine how much you can afford to borrow. The co-borrower is also responsible for the repayment of the mortgage. Using these estimations, if you and your co-borrower have a combined annual income of $80,000, you should be looking to purchase a home priced no more than $200,000, if your combined on income of $40,000, your new home should cost no more than $100,000.
This gives you a rough estimate of what you can expect to pay for a home. There are plenty of mortgage calculators on the Web to help give you a better picture.
Your ability to buy a home will also depend on three things:
- How much you have available for the down payment.
- How much a financial institution will agree to lend you.
- Your credit situation.
We will look at ways you can can come with your down payment and closing costs, as well as guidelines lenders follow to determine how much they will loan you to buy a home.
Your Down Payment
The amount you can afford pay for a home may be limited by the amount of your down payment and closing costs. If you are a first time homebuyer, your savings may be your principal source of your down payment. If you don't have a substantial amount saved, you may need to start putting money aside from each paycheck before you consider buying a home.
The amount of your down payment will determine how much money you need to borrow for your mortgage loan.
$200,000 purchase price
-10,000 5 percent down payment
--------
$190,000 mortgage amount
$100,000 purchase price
-5,000 5 percent down payment
-------
$95,000 mortgage amount
Your Ability to Borrow
Your down payment is only part of the equation when buying a home. The next factor is how much you can borrow. When you are applying for a loan, the lender will be looking at three factors in determining how much of a loan they will approve you for:
- Earnings
- Existing debt level
- Credit and payment history
Guidelines Lenders use to Qualify You
Lenders use two main guidelines to decide whether you qualify for a loan or not.
- Your monthly housing expenses, which are: mortgage payment, property taxes, insurance, and condo or homeowner association fees (if applicable) should be no more than 28 percent of your monthly gross (before-tax) income.
- Your monthly housing costs plus other long term debts should total no more than 36 percent of your monthly gross income.
Not only do lenders, but financial advisers will also recommend that you spend no more than 25-28 percent of your income on housing and not more than 33-36 percent on your total debt (housing, credit cards, and other debt). If you exceed any of these ratios the lender may be able to make some exceptions with qualifying factors like: substantial savings reserves, high credit score or being on on your job for a considerable time. So it is possible to still qualify for loan exceeding the ratios, but it is probably not a good way to start out. You may find that some local, state, or federal programs have limits on the percentage of debt you have and may disqualify you from participating as well.
There are many excellent resources online that can help you find what size mortgage is right for you.
Bank Rate
http://www.bankrate.com/calculators/mortgages/mortgage-calculator.aspx
Fannie Mae
http://www.fanniemae.com/homebuyers/index.html
Freddie Mac
http://freddiemac.com/corporate/buyown/english/calcs_tools/
When you apply for your mortgage, the lender will review all the necessary data: your income, your existing debt, the purchase price of the home, your down payment, the interest rate on the purposed loan, and the cost of your property taxes and insurance. They will then calculate if you you qualify for a loan in the amount you need to purchase the house.
Qualifying for a loan is only the beginning. During the approval process the lender will determine how much of a mortgage you would be eligible for if your loan application is approved.
This gives you a rough estimate of what you can expect to pay for a home. There are plenty of mortgage calculators on the Web to help give you a better picture.
Your ability to buy a home will also depend on three things:
- How much you have available for the down payment.
- How much a financial institution will agree to lend you.
- Your credit situation.
We will look at ways you can can come with your down payment and closing costs, as well as guidelines lenders follow to determine how much they will loan you to buy a home.
Your Down Payment
The amount you can afford pay for a home may be limited by the amount of your down payment and closing costs. If you are a first time homebuyer, your savings may be your principal source of your down payment. If you don't have a substantial amount saved, you may need to start putting money aside from each paycheck before you consider buying a home.
The amount of your down payment will determine how much money you need to borrow for your mortgage loan.
$200,000 purchase price
-10,000 5 percent down payment
--------
$190,000 mortgage amount
$100,000 purchase price
-5,000 5 percent down payment
-------
$95,000 mortgage amount
Your Ability to Borrow
Your down payment is only part of the equation when buying a home. The next factor is how much you can borrow. When you are applying for a loan, the lender will be looking at three factors in determining how much of a loan they will approve you for:
- Earnings
- Existing debt level
- Credit and payment history
Guidelines Lenders use to Qualify You
Lenders use two main guidelines to decide whether you qualify for a loan or not.
- Your monthly housing expenses, which are: mortgage payment, property taxes, insurance, and condo or homeowner association fees (if applicable) should be no more than 28 percent of your monthly gross (before-tax) income.
- Your monthly housing costs plus other long term debts should total no more than 36 percent of your monthly gross income.
Not only do lenders, but financial advisers will also recommend that you spend no more than 25-28 percent of your income on housing and not more than 33-36 percent on your total debt (housing, credit cards, and other debt). If you exceed any of these ratios the lender may be able to make some exceptions with qualifying factors like: substantial savings reserves, high credit score or being on on your job for a considerable time. So it is possible to still qualify for loan exceeding the ratios, but it is probably not a good way to start out. You may find that some local, state, or federal programs have limits on the percentage of debt you have and may disqualify you from participating as well.
There are many excellent resources online that can help you find what size mortgage is right for you.
Bank Rate
http://www.bankrate.com/calculators/mortgages/mortgage-calculator.aspx
Fannie Mae
http://www.fanniemae.com/homebuyers/index.html
Freddie Mac
http://freddiemac.com/corporate/buyown/english/calcs_tools/
When you apply for your mortgage, the lender will review all the necessary data: your income, your existing debt, the purchase price of the home, your down payment, the interest rate on the purposed loan, and the cost of your property taxes and insurance. They will then calculate if you you qualify for a loan in the amount you need to purchase the house.
Qualifying for a loan is only the beginning. During the approval process the lender will determine how much of a mortgage you would be eligible for if your loan application is approved.
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