A home is likely the biggest purchase you will make in your lifetime. While your lender will analyze various factors of your finances to determine how much mortgage you can afford, there are additional ways to buy the home you want and the home you can afford.
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Meet with a mortgage banker first.
The first step in homebuying should always be meeting with a mortgage lender. A pre-approval will give you an idea of the amount you could be loaned for a home purchase. Determining how much home you can afford weighs on multiple factors, including what you're comfortable paying, income, mortgage rates, home type, credit score and financial plans.
Most lenders recommend that your mortgage payment, including principal, interest, taxes, and insurance (known as PITI), be less than 28 percent of your gross monthly income. Your lender will analyze your debt-to-income ratio, which includes your monthly obligations such as credit card minimum payments, student loans, alimony, child support, and car loans along with your PITI. Lenders look at this to ideally be at or below 36 percent of your gross monthly income.
Check your credit score.
Preparation to buy a home typically starts long before walking through a potential home option. Part of that preparation is knowing and maintaining your credit score. People who know their credit scores feel significantly more prepared to buy a home than those who don't know their score (70% vs. 54%), according to a recent Experian survey. Depending on your loan type, a higher credit score will typically get you the lowest interest rates.
Lenders use your median FICO score from the three credit agencies - Experian, Equifax and TransUnion - to represent your score through the home financing process. Fifty-eight percent of future homebuyers are actively working on improving their credit in order to qualify for a better home loan interest rate.
You can't improve what you don't know, so keeping your credit score high or improving it will put you in the best position to buy a home and likely at a more affordable interest rate.
Analyze your cash flow.
While your lender will approve you for a certain amount to purchase with, you also need to determine what an affordable home budget looks like for you. Keep in mind the costs of home maintenance and improvements, utilities, cable, internet, and other large purchases for you home, such as furniture and appliances.
Know your options for down payments.
Contrary to popular belief, the need for a 20 percent down payment is no longer the status quo for purchasing a home. While a large down payment can offset the costs of your monthly mortgage payment and could get you out of paying for private mortgage insurance (PMI) if you put down 20%, there are low down payment loan options available that don't have to deplete your savings.
Select the right real estate agent for you.
Finding a compatible real estate agent is all about finding someone with experience and knowledge and someone who aligns with your homebuying goals. Find an agent who puts their client's satisfaction first and will put in the time and effort into finding you a home in your ideal price range.
Look within your price range.
Start by making a list of "wants", "needs" and "deal-breakers" in a home. If you're like the majority of today's homebuyers, you'll start your home search online. By looking for a home online, you can compare the homes listed in your price range and your "wants", "needs", and "deal-breakers" lists before you do a walk-through.
While online pictures don't always do a home justice, you'll be able to get an idea of what the market has to offer in your price range and what that looks like for your homebuying needs.
Stay within that price range when you put in an offer.
Homebuying can be an emotional process, but it's important to be rational when it comes to negotiating a purchase offer. Don't overextend your budget in a bidding war because you're afraid you won't find another home like it or you're simply exhausted with the buying process.
To give yourself the best bidding power, consider getting a loan commitment before selecting a home to purchase. Loan commitments take pre-approvals a few steps further and show sellers that you're not only committed to making a home purchasing but your lenders has approved your loan (pending a home appraisal).
Account for and/or minimize closing costs.
Closing costs typically range from 2 to 5 percent a home's purchase price. So if you're purchasing a $175,000, you could pay anywhere from $3,500 to $8,750 at closing, not including your down payment.
Many homebuyers cite the upfront costs of homeownership as one of their biggest homebuying obstacles, but as a homebuyer, you are not powerless to your closing costs. You can minimize or avoid these fees at closing by negotiating with your seller to pay some or all of the closing costs or get a no-closing cost mortgage.
For more information about home buying and financing in general, download our free Mortgage 101 Handbook, a great resource for firs-time and repeat homebuyers.
To see what an affordable mortgage payment might look like for you, use one of our mortgage calculators to compare home options. As mentioned, a pre-approval or loan commitment should always be the first step in homebuying. Contact one of our mortgage bankers for more information about getting a pre-approval or click the button below to get started.