How To Determine How Much Home You Can Afford
Buying a house may feel like a major commitment but it is one of the most powerful and rewarding purchases you can make. Mortgage loans can be complicated, and there are many different fees and expenses that arise during the process of buying a home. Planning ahead of time for the amount you can afford is a smart way to feel confident going into the homebuying process. At MHS Lending we believe knowledge is power and that’s why we are so dedicated to providing resources so you can make a well-informed decision. There are many factors that go into determining the amount of house you can afford, so we broke down the main points in an easy-to-follow guide below.
How much a house really costs
It’s important to understand that the purchase price of the home is not the only financial commitment you’re making when you buy a house. While you will be likely getting a loan to cover the house and then making mortgage payments over time, there are still some expenses to be aware of. To get to the closing table you will still need to pay a down payment (or funding fee for military members which may be eligible to be rolled into the loan), an appraisal (which can be covered if you take our VA Home Loan Seminar), and a home inspection / other inspection you may want for peace of mind. If you are an active-duty military member or a veteran, the VA Loan is an amazing benefit reserved exclusively for you which can help you avoid hefty down payments and private mortgage insurance.
Another factor to keep in mind is that even if there is a purchase price listed and you have an idea of what that mortgage will be each month, there are some fees that can’t be negotiated like HOA fees and taxes. These add on to the amount of the loan you get and can drive up your monthly expenses.
Other expenses that can affect how much you will need
Other expenses that may arise right after (or along with) your home purchase are any needed repairs to the property. During the homebuying process you will likely get a home inspection to see what red flags arise within the house and this is when you can request that the seller make repairs. If they only agree to a few (or don’t agree to any) you can then decide whether it’s worth moving forward. You may want to address faulty major appliances or safety issues before moving in and this could be another expense that comes out of your pocket.
Another factor to remember is that life happens and sometimes losing a job or having a family emergency can leave you in a situation when paying for your mortgage becomes difficult. It’s always good to have some cash reserved for these emergency situations, especially when buying a new home. NerdWallet states that a good affordability rule of thumb is to have three months of payments, including your housing payment and other monthly debts, in reserve.
What lenders look at to calculate pre-approvals
Loan officers do a deep dive into your finances before pre-approving you for a loan. The amount you are pre-approved for is dependent on a variety of factors and is incredibly important when you search for a house so you can make sure to look at homes you are eligible to purchase. Lenders look at many things when finalizing the loan, but the most important ones are your credit score, cash on hand, and debt-to-income (DTI) ratio. A DTI ratio is determined by comparing the amount you owe each month (mortgage payments, car payments, student loans, etc.) to your monthly pre-tax income. This shows the lender how much income you should have left over every month to dedicate to a new mortgage. Lenders who specialize in VA Loans will also consider your BAH and other military financial factors, so you get the pre-approval rate that makes the most sense for you.
Buying a beautiful home that fits your lifestyle and is affordable throughout your life is important. In July of 2020 CoreLogic calculated that the 120-day delinquency rate for mortgage payments was at 1.4% (up from 0.12% during the same period in 2019). In order to avoid being part of this statistic and to commit to a loan that works for you it’s important to consider all the factors listed above and work with a lender who will help you determine the best course of action for you. At MHS Lending we specialize in working with military families and veterans and we make it our mission to help you get into your dream homes. If you’re ready to start your homebuying journey, give us a call today!