To determine how much you can afford to spend on a home, you should consider your entire financial situation. Your buying power depends on how much cash you have available and how much you can borrow and how much you can comfortably afford for your monthly payment.
A down payment
is the money you use to lower the amount due on a purchase. The minimum down payment required will be determined by your lender and the type of mortgage you get. Some loan programs do not require a down payment.
Closing costs are incurred by the seller and buyer in the final step during which ownership of the house is transferred to you. These costs generally range from 3% to 5% of your loan amount.
Mortgage loan funds
Perhaps the biggest factor in determining how expensive a home you can buy, will be how much you can afford to borrow. A lender will consider both your earnings and your existing debts in determining the size of your loan.
It’s generally recommended that a household should spend no more than about 28% of its gross income on housing and no more than about 36% on total debt (housing plus other debts). Following these guidelines, homeowners should be more comfortable paying their mortgages.
As you consider how much you can afford, remember that your monthly housing expenses will consist of the principal, interest, taxes and insurance (also known as PITI) plus utilities, maintenance and possibly private mortgage insurance (PMI).
PMI is usually required when your down payment is less than 20%. This protects the lender against loss if you don’t make your mortgage payments. If PMI is required, then it’s also part of your monthly mortgage payment.
We can help you determine how much home you can afford. We offer online calculators and resources that will help you understand your situation and let you make a decision you’re comfortable with.
Getting pre-qualified for a mortgage loan is the best way to find out what price range of homes will fit your budget. It’s also a useful tool when you’re ready to start shopping for a new home. It says to the seller you’re serious about your intent to buy and that you have access to a mortgage loan for the purchase.
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