You’ve decided it’s time to buy your first house. You’ve rented for years and are tired of giving your money to someone else. So, you’ve saved for a down payment, you’ve brought up your credit score and you feel ready to delve into homeownership.
But how much will you actually qualify for in a mortgage? That’s a question most first-time home buyers want to know.
It’s hard to tell until all the paperwork is in, and the lender puts in all your information into specialized software programs. But to get an idea of where that number might land, you can always go online to the many self-help calculators and plug in your figures. Determining your budget should also mean including everything from what you pay for your food to health insurance to student loans each month.
Remember that these calculators are just informative and not the actual guarantee that you will even qualify for a loan.
Know your Budget
Even if a lender tells you that you qualify for a certain amount for a house, that doesn’t mean you need to borrow that high of an amount or buy such an expensive house on the top of your budget. You need to understand your own budget and your own dreams before agreeing to any amount the lender approves.
You already know if you can afford those monthly payments by what you’ve been paying for rent. But owning house adds in more expenses such as property taxes and home insurance.
You also have to take care of repairs and maintenance – which can be quite expensive especially when things start breaking. One week, your refrigerator goes out. The next week, it could be a broken window. You never know, and you have to have an emergency bank account for such problems that arise.
“I never push anyone into a house that is bigger than what they need,” says Patrick Bonnett, loan officer at Inland Bank in Omaha. “But if it is a young couple in their 30s and they are looking to start a family in the near future and their job prospects are good with good cash flow, I will have them really look into upgrading to a bigger house with a few extra bedrooms. Loans won’t be at 3.5 percent in a few years. Even a quarter point interest rate can add a huge amount to someone’s bill.”
Know your Priorities
He states that most lenders take into consideration your total monthly gross income (the money you make before taxes are taken out) and your monthly expenses. These expenses address property taxes, private mortgage insurance (if you don’t have 20 percent down payment), home association dues, property insurance, credit card payments, student loans, car payments and other debt.
A loan officer should start with a personal discussion to discover what is really important in your life, Bonnett says.
“I try to find out what motivates that particular borrower. There is a baseline of priorities that needs to be established,” he says.
Know your Limits
He counsels his borrowers that their total housing payments including should remain below 32 percent.
“That’s not a hard and fast rule. But by keeping well below the 32 percent rate, they will be able to meet their other needs and hopefully have some spending money, too, so they can live their lives,” Bonnett says.
Most lenders will only allow a maximum debt-to-income ratio of 41 to 43 percent. The ratio comes from your gross monthly income that includes all income even pension, social security benefits, child support and alimony, and even that second job that only pays a few thousand bucks each summer.
Know your Future
Bonnett and other lenders also look farther into the income situation and expenses.
“There are variable expenses and variable revenues. Do they have prospects of getting a raise? Are they working in an area that will have high demand for their profession?” he says.
A good lender will help new homeowners to figure out where their comfort level is with a loan, and possibly how to have a bigger down payment so monthly payments are lower. They are there to help show the different loans available for you.
“Having a financial plan is critical. Our society is so status conscious that it plays tricks on our minds and causes us to want things we can’t afford,” he says. “We may be able to afford the house, but not the grill or outdoor furniture.”