|Owning a Home
How Much Home Do
I Qualify For?
Income. Debt. Down Payment. Closing Costs. Two Years Income
Tax Returns. Assets. Liabilities. IRAs. You want WHAT? Just what
can I afford?
Buying a home in today s marketplace is a bit intimidating. And
your new home purchase is likely to be one of the most important
decisions you ve ever had to make. Usually it s one of the
single most valuable assets you ll own.
Where to Start
Before you invest hundreds of hours searching--and to avoid any
heartbreak if you find yourself unable to qualify for your dream
home--sit down with a lender. Your lender can perform a simple
verbal prequalfication in about twenty minutes and a
full-fledged prequalfication in about 5 days.
Pre-qualification not only allows you to focus your search in
the correct price range, saving a lot of wasted time and
frustration, but it can also give you an edge when competing
with other offers on a home that you find. If a seller is
deciding between two offers -yours who has been qualified and
another unqualified offer, they are much more likely to pick
yours. Pre-qualification will also give you leverage when
negotiating with a seller in a non-competitive atmosphere; it
essentially makes you a cash buyer.
The amount of home that you qualify for will be determined by
three key factors: your down payment, your ability to qualify
for a mortgage and closing costs.
The Down Payment
Whereas a current homeowner can rely on equity from their home
sale, a first time homebuyer is limited to the money they can
save. The days of having to put 20 percent down on a home are in
the past, although putting a large amount of money down
definitely makes it easier to qualify for a mortgage and to get
the lowest interest rates available. With the various programs
that are available today, you can put as little as 3 percent
down on a home.
Qualifying for the Mortgage
There are two basic guidelines that lenders use to determine
what size mortgage you are eligible for:
Specifically, most lenders will consider 4 key factors to
determine your ability to qualify for a home loan:
- Your monthly mortgage payment of principal, interest,
taxes and insurance (PITI) should not exceed 25 to 28% of
your monthly gross income.
- Your monthly housing cost (PITI) plus other long-term
debt should not exceed 33 to 38% of your monthly gross
Income This first element can include not only your
gross monthly income and secondary income (commissions, bonuses)
but also your history of employment, stability of income,
education, even potential for future earnings.
Credit History -- This encompasses your history of debt
repayment, total outstanding debt, highest balance, and your
highest monthly debt balance.
Assets Your assets consist of cash on hand, savings and
checking accounts, CDs, stocks, bonds or any other type of
Property The home you are planning to purchase will be
appraised to determine the market value. The estimated value
must be sufficient to secure the loan. Lenders will loan you no
more than a certain percentage (usually 95%) of this value.
Keep in mind that in addition to your down payment, you will
also be responsible for paying fees for the loan and closing
costs. These will be required at the time of closing unless you
qualify and choose to have these included in your financing.
- Closing Costs generally will range between 2 percent and
6 percent of the mortgage loan, depending on the loan and
lender. You will be provided with a "Good Faith Estimate" of
closing costs so you can know what to expect.
- "Points", which are one-time charges equal to one
percent of your loan amount, may be required by your lender
- Your closing agent will charge a fee at the close of the