When buying your first house, it always helps to know how much you can afford. To calculate how much home you can buy, you need to consider several factors, such as household income, the amount of savings you have on hand for a down payment, and your monthly debts.
Your house will likely be the biggest purchase you’ll make in your lifetime, so understanding how much you can afford is a major step in the overall process. Fortunately, we have the ingredients to help you get a good idea of what you can factor in when browsing the marketplace.
What Are Lender Ratios?
Since you’ll be working with a lender, it’s best to go with one that makes the process simple, easy and tech-friendly, like with Minute Mortgage. Minute Mortgage uses a tech-forward approach to this part of the buying process, bringing a digital solution to something that’s traditionally weighed down by mounds of paperwork.
When deciding how much they want to give you, lenders calculate and consider the front-end ratio, which means that a new mortgage payment is a fraction of a homebuyer’s gross income (I.E., before taxes). The back-end ratio is more challenging and refers to a total overall monthly debt as a percentage of gross income. For front-end ratios, the real estate industry standard is near 28 percent and for back-end, it’s higher, closer to 36 percent.
What’s more, depending on a homebuyer’s credit rating, employment situation and lender policies, these percentages can end up being higher. A mortgage lender will usually use the lower of the two ratios as a buyer’s upper spending limit. Because mortgage rates fluctuate constantly, and other factors are considered including property taxes and homeowners insurance rates, it’s complicated when trying to set a maximum amount for a mortgage budget.
Monthly Debts: They Add Up
It’s crucial to factor in your monthly debts to ensure you can afford a mortgage payment. A good rule of thumb is to make sure you have money left over in your budget, after your mortgage payment, to pay for things like cell phones, utilities (especially if you have a larger home), food, gas, car payments, etc.
For borrowers, it’s a good idea to pay off as much debt as possible to qualify for a mortgage as well as keep some room in there for an ongoing mortgage payment. Outside of your daily needs, such as groceries and gas for your car, see what you can pay off now or do without (for example, streaming services or that monthly massage). By paying off debt and shaping up your monthly budget, you’ll be in a better position to manage your costs.
Know When to Purchase a Home
Some homebuyers may feel they need to hold off on buying a house so that the market is more ideal for them. This is especially true in these times as the market has seen a seismic shift from a buyer to seller marketplace. Working with a knowledgeable real estate agent can help to limit the stress and confusion by guiding the buyer to the right homes at the right time to buy.
In general, the best time of year to buy a home may depend on a variety of factors, including the economy, region, and unprecedented issues such as COVID-19. However, the home buying market usually tilts toward homebuyers’ favor during the spring and summer as potential buyers can get in on lower prices, access more available properties, and even get better ratios from lenders.
Just like your budget, it also helps to get your credit score in good shape before you apply for a house. First, check your credit report and get a full rundown of what may be hurting it. The three big agencies, Experian, Equifax and TransUnion, can provide you with a detailed look at your history and what you can do to improve your score.
If you find mistakes in your report, be sure to alert the reporting agency instantly so you can keep the ball rolling on your home purchasing process. Also, keep in mind that you might have to prove that the dings on your credit report are wrong by providing evidence, such as payment history.
While there are many more factors you can consider when buying a house, starting with these basic topics can help you get what you need to be lined up. By outlining your overall budget, reviewing your current finances, finding ways to strengthen your credit score and working with a reputable agent, you’ll find yourself in a better position with lenders and the available homes you can potentially qualify for.