If you want to reap the benefits of homeownership, maybe now is a great time to buy thanks to low mortgage rates.
The coronavirus pandemic has prompted the federal government to take action to stimulate the economy, including lower mortgage rates. This, in turn, has led to near record mortgage interest rates and a strong real estate market, creating an opportunity for buyers who are able to sustain a home loan.
Part of the home buying process is knowing how much home you can afford. Here’s what you need to know.
4 factors that determine how much home you can afford
With the aid of online mortgage calculator can help you estimate monthly mortgage payments and lower home prices within your range. You will need to make sure that you can pay these monthly payments – and think about how these four factors affect your options when searching for the perfect home.
- Annual salary
- Credit score
- Debt-to-income ratio
- Interest rate
1. Annual salary
The annual salary is something lenders take into account when getting a mortgage to buy a home. After all, mortgage lenders need to know that you can afford your monthly payments.
Your income does not impact your credit score directly, but it may affect your ability to get a home loan. There isn’t a salary threshold that mortgage lenders look for in the mortgage process, but you need to be able to verify what you’re earning.
This usually means providing:
- Copies of your pay stubs
- W-2 and copies of your income tax returns
- 1099s and copies of your tax returns if you are self-employed
- Employment verification
If your income is irregular because you have a seasonal job or are self-employed, you may be asked to explain any inconsistencies to your lender or mortgage broker. AT to learn more about the impact of your income on the approval of your mortgage application, visit Credible.
2. Credit rating
Credit ratings are a measure of how responsibly you manage your finances. Unlike income, mortgage lenders can use established minimum credit score guidelines to determine if they should approve you for a home loan.
For example, if you are interested in a conventional loan, Fannie Mae’s guidelines set the minimum credit score at 620. But if you are looking for an FHA loan, it is possible to qualify with a credit score as low as 580.
If you want to know how your credit rating can affect your ability to get a mortgage and buy a home, you could get prequalified or pre-approved. Getting prequalified can give you an idea of what loan terms you’re likely to qualify for, while mortgage pre-approval makes it easier to assess how much home you can afford.
A mortgage pre-approval letter can also be a bargaining chip when negotiating an offer on a home. You can visit an online mortgage broker like Credible to compare rates, choose the length of your loan and get pre-approved from multiple lenders.
3. Debt-to-income ratio
Your debt to income ratio means how much of your monthly income goes towards debt. Mortgage lenders use it, along with your annual salary, to gauge your chances of being able to meet your monthly payments.
Lenders can use the 43% rule when approving a first-time home buyer or any other buyer for a mortgage. Essentially, you wouldn’t qualify if your monthly mortgage payments and other debts exceed 43% of your monthly income. The more debt you have, including credit cards or student loans, relative to your income, the more it can reduce the amount of a mortgage you qualify for.
To see what type of loan term and rate would suit you financially, then enter simple information into Credible’s free online tools.
4. Interest rate
The interest rate you get on a mortgage can also affect how much you can afford. A lower interest rate can mean a lower monthly payment. The lower your monthly payment, the more affordable a mortgage becomes, even when the price of the home is at the top of your budget.
This is true for both mortgage loans and mortgage refinancing loans. Qualifying for low mortgage interest rates usually depends on a good credit rating, although lenders also consider your income and other debts. Go to Credible to compare rates and lenders in minutes.
Other home buying costs
If you’re buying a first-time home, you may not be aware of the other costs associated with home ownership. For example, in addition to your monthly mortgage payments, your home buying budget should also include:
- Your deposit
- Closing costs
- Expertise and inspection fees
Beyond that, you might want to factor in running expenses like maintenance, upkeep, and repairs. All of this can increase the cost of buying and owning real estate.
The bottom line
If you decide to buy a home, it helps to understand the basics of the mortgage process and how it works. This includes comparing mortgage loan programs and finding ways to save money. Financial aid programs, for example, can offer help with down payment and closing costs for qualified buyers.
Most importantly, when preparing to buy, take the time to compare prices carefully. Consider visiting Credible for get in touch with experienced loan officers and get answers to your most important mortgage questions.