Several things can influence the mortgage amount that you can qualify for when buying a home. (iStock)
If you are interested in enjoying the benefits of home ownership, now may be the ideal time to buy, thanks to the low mortgage rates.
The coronavirus pandemic prompted the federal government to take steps to boost the economy, including cutting mortgage rates. This, in turn, generated near-record mortgage interest rates and a strong housing market, creating an opportunity for buyers who can afford a home loan.
Part of the process of buying a home involves knowing how much home you can afford. Here’s what you need to know.
4 factors that determine how much house you can afford
Using an online mortgage calculator can help you estimate monthly mortgage payments and reduce home prices in your range. You need to make sure you can afford these monthly payments – and consider how these four factors affect your options as you search for the perfect home.
- Annual salary
- Credit score
- Debt / income ratio
- Interest rate
1. Annual salary
Annual salary is something that lenders consider when getting a mortgage to buy a home. After all, mortgage lenders need to know that you can pay your monthly payments.
Your income does not directly affect your credit score, but it can affect your ability to obtain a mortgage loan. There is no salary limit that mortgage lenders look for in the mortgage process, but you need to be able to check what you earn.
This usually means providing:
- Copies of your payment receipts
- W-2s and copies of your 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. To learn more about how your income can affect the approval of your mortgage application, go to Credible.
2. Credit score
Credit scores are a measure of how responsible you manage your finances. Unlike income, mortgage lenders can use established minimum credit score guidelines to determine whether to 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 to 620. But if you are looking for an FHA loan, you can qualify with a credit score as low as 580.
If you are interested in how your credit score can affect your ability to obtain a mortgage and buy a home, you can obtain a prequalification or pre-approval. Being pre-qualified can give you an idea of which loan terms you are 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 for a home. You can visit an online mortgage broker like Credible to compare rates, choose the loan term and be pre-approved with several lenders.
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3. Debt / income ratio
The debt-to-income ratio means how much of your monthly income goes into debt. Mortgage lenders use this, along with your annual salary, to assess the likelihood that you will be able to pay your monthly payments.
Lenders can use the 43% rule when approving a first-time buyer or any other buyer for a mortgage. Essentially, you would not be able to qualify if your monthly mortgage and other debt payments exceed 43% of your monthly income. The more debt you have, including credit cards or student loans, in relation to your income, the more it can reduce the value of the mortgage you can qualify for.
To see what kind of loan term and fees would work for you, financially, enter some simple information into Credible’s free online tools.
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4. Interest rate
The interest rate attached to a mortgage can also affect the value of the home you can afford. A lower interest rate can mean a lower monthly payment. The lower your monthly payment, the more affordable the mortgage becomes, even when the price of the home is at the upper limit of your budget.
This is true for both mortgage loans and mortgage refinance loans. Qualification for low mortgage interest rates usually depends on a good credit score, although creditors also consider your income and other debts. Go to Credible to compare rates and creditors within minutes.
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Other home purchase costs
If you are a first time home buyer, you may not be aware of the other costs associated with purchasing a home. For example, in addition to monthly mortgage payments, your home purchase budget should also include:
- Your payment
- Final costs
- Assessment and inspection fees
In addition, you may want to consider ongoing expenses, such as maintenance, upkeep and repairs. All of this can increase the cost of buying and owning a property.
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The final result
If you decide to buy a home, it is helpful to understand the basics of the mortgage process and how it works. This includes comparing mortgage lending programs and looking for ways to save money. Financial assistance programs, for example, can offer help with payment funds and closing costs to qualified buyers.
Most importantly, when preparing to buy, take the time to compare rates carefully. Consider visiting Credible to get in touch with experienced credit agents and get answers to your most important mortgage questions.
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