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How Much House Can You Afford?
As a broad generalization, most people can afford to purchase a house worth about three times their total (gross) annual income, assuming a 20% down payment and a moderate amount of other long-term debts, such as car or student loan payments. With no other debts, you can probably afford a house worth up to four or even five times your annual income.
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Check Your Credit History
When reviewing loan applications and making financing decisions, lenders typically request that the credit bureaus reporting your file -- Equifax, Experian, or TransUnion -- provide your credit risk score (also known as your FICO score, named after Fair, Isaac & Company, which developed many of the computer scoring models). This seemingly mysterious number represents a statistical summary of the information in your credit report, including: your history of paying bills on time, the level of your outstanding debts, how long you've had credit, how many credit cards and loans you have, your credit limit, the number of inquiries for your credit report (too many can lower your score, though they've refined the program so this is less of a problem than it once was), and
the types of credit you have.
The higher your credit score, the easier it will be to get a loan. If you routinely pay your bills late, you can expect a lower score, in which case a lender may either reject your loan application altogether or insist on a very large down payment or high interest rate to lower the lender's risk.
Because your credit history has such an important effect on the type and amount of mortgage loan lenders offer you, always check your credit report and clean up your file if necessary -- before, not after, you apply for a mortgage.
Loan Preapproval vs. Loan Prequalification
Once you've done the basic calculations and completed a financial statement, you can ask a lender or loan broker for a prequalification letter saying that loan approval for a specified amount is likely based on your income and credit history. Prequalifying lets you determine exactly how much you'll be able to borrow and how much you'll need for a down payment and closing costs. Many of the mortgage websites have prequalifying calculators to help with this task. (See Online Mortgage Shopping.)
Unless you're in a very slow real estate market, with lots more sellers than buyers, you will want to do more than prequalify for a loan: You will want to be preapproved -- that is, guaranteed -- for a specific loan amount. This means a lender has already checked your credit and evaluated your financial situation, rather than simply relying on your own statement about your income and debts. Preapproval means that the lender would actually fund the loan, pending an appraisal of the property, title report and purchase contract. Having a lender preapprove you for a loan is crucial in a competitive market -- without it, you stand little chance of your offer being accepted.
What are the best sources of home loans or mortgages?
Many entities, including banks, credit unions, savings and loans, insurance companies and mortgage bankers make home loans. Lenders and terms change frequently as new companies appear, old ones merge and market conditions fluctuate. To get the best deal, it's a good idea to compare loans and fees with at least a half a dozen lenders. Because many types of home loans are standardized to comply with rules established by the Federal National Mortgage Association (Fannie Mae) and other quasi-governmental corporations that purchase loans from lenders, comparison shopping is not difficult. Be sure to ask for the same size, type, and length of mortgage -- such as a 30-year fixed term mortgage for $300,000 -- so you're comparing apples to apples.
What are options for buyers who can't afford a 20% down payment?
Assuming you can afford (and qualify for) high monthly mortgage payments and have an excellent credit history, you should be able to find a low (10% to15%) down payment loan. However, you may have to pay a higher interest rate and loan fees (points) than someone making a larger down payment.
What is private mortgage insurance?
Private mortgage insurance (PMI) policies are designed to reimburse a mortgage lender up to a certain amount if you default on your loan and the foreclosure sale is less than the amount you owe the lender -- that is, the amount of your mortgage loan plus the costs of the foreclosure sale. Most lenders require PMI on loans where the borrower makes a down payment of less than 20%. Premiums are usually paid monthly and typically cost less than one-half of one percent of the mortgage loan. With the exception of some government and older loans, you can drop PMI once your equity in the house reaches 22% and you've made timely mortgage payments. Ask your lender for details on the cost of PMI and requirements for canceling it. |
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