Affording Your First Home
Are you finally considering diving into the world of home ownership? If so, congratulations! Buying a home is a huge decision that should not be taken lightly. However, it is usually a smart decision, especially for those that have been previously renting. With rent rising across America, buying a home serves as an excellent way to save money month-to-month while building equity. But first, you need to know what you can afford. Here are some tips for determining how much home you can afford.
Do you have a steady income?
The first question you need to ask yourself is whether or not you have a steady income. It is best to buy a house or apartment when you have maintained a steady income for a couple of years, and plan on keeping this job for the foreseeable future. This shows lenders that you can responsibly pay your debts, and illustrates how much you can afford to pay on a month-to-month basis. Usually, pay stubs and tax returns will be enough to show lenders how much income you have coming in.
How much debt do you have?
Even if you have a steady income, large debts can make it difficult to secure a mortgage. Whether you have car loans, student loans, credit card debt, and/or medical bills – keep in mind that these debts will count against your income, making the amount of loan you are able to secure a bit lower. It is best to work on paying off these debts as much as possible before starting the home buying process. This will help your credit score, too!
Do you have money saved?
Usually, a down payment of about 20% of the home’s price is recommended in order to get the best interest rate on a mortgage. There are, however, certain lending programs for which you may qualify to avoid the big 20% down the number. When beginning to think about what price range you are looking into for your first home, keep in mind what kind of down payment you would need to have saved up. Also, having money for a down payment shows good faith amongst lenders and sellers alike.
The 36% Rule
Taking the above points into consideration is the 36% rule. This rule states that a homebuyer should not spend more than 36% of their income on debts (this means ALL debts: car, student loans, credit card debt, and mortgage). Make a list of all of your debt in comparison with your income. Be sure to include your spouse or partner’s financial debts/incomes (or whoever else will be paying the mortgage) if they are also buying the home with you. From here, you can determine how much of your income is currently being eaten up by debt, and see how far away you are from that 36% number. Doing this will give you an idea of what percent of your income can go towards a mortgage payment each month.
Before you try to determine how much you can afford, it is important to speak with a professional mortgage specialist. A professional will take a holistic view of your financial picture to determine exactly what they believe you can comfortably afford and be approved for. This crucial process is called pre-approval and allows homebuyers to better search for homes within their budget. It also shows home sellers that you are a serious buyer and can realistically make an offer.
Speak With a Lending Professional Today
Get started on the path to home ownership today by contacting GuardHill Financial. As professionals in mortgage lending, we are prepared to help you throughout the entire lending process. With our help, you will be in your first home in no time at all! It all begins with the first step. Let’s get started today.