Early in the process, you will want to meet with a mortgage professional and be pre-qualified for a mortgage loan. This lets you move swiftly when you find the right home. It also shows the seller that you are serious and can afford to buy the property. A pre-approval is a simple calculation done by a mortgage lender that tells you the amount you’ll be able to finance through a loan and what your monthly payment will be.
Three factors determine how much home you home you can afford:
- Between 3.5% and 5.0% of the cost of the home is usually required for most loans.
- If you can afford a down payment of 20% of the cost of the home, you may be able to eliminate mortgage insurance.
Ability to Qualify, according to what lenders look for:
- Your income, including your history of employment, the stability of your income, potential for future earnings, and any secondary sources of income, like bonuses, child support, commission, etc.
- Your credit report, including total current debt and history of repayment.
- Your assets, which means cash on hand and other liquid assets, like bank accounts, stocks, CDs, etc.
- Your property, or the home you are planning to buy, which the lender will have appraised.
- Most lenders want your monthly payment to be 25 – 28% of your gross monthly income.
- Your monthly debt payments – mortgage, consumer loans, etc. – should be 33 – 38% of your gross monthly income, as a general rule of thumb.
- Total typical closing costs are 2 – 5% of your mortgage loan.
- Costs include fees for loan processing, appraisals, title searches, etc.
- Closing costs usually must be paid in cash, unless you are able to include them in your financing.