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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. 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
will ever 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. Most lenders can perform a simple verbal pre-qualification in about
twenty minutes and a full-fledged pre-approval in about 5 days.
Pre-approval 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 which has been approved and
another unqualified offer, they are much more likely to pick yours. Pre-approval 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 easier 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, or sometimes none at all.
Qualifying for the Mortgage
There are two basic guidelines that lenders use to determine what size
mortgage you are eligible for:
-
Your monthly mortgage
payment of principal, interest, taxes and insurance (PITI) should not
exceed 25 to 28% of your gross monthly income.
-
Your monthly housing
cost (PITI) plus other long-term debt should not exceed 33 to 38% of your
gross monthly income.
Specifically,
most lenders will consider 4 key factors to determine your ability to
qualify for a home loan:
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, and 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 liquid asset.
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.
Closing Costs
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 at closing.
-
Your closing agent will
charge a fee at the close of the sale.
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