Home Buying: What can you afford?

When you decide to buy your own home, it is a multi-step process. The first inclination is to browse through home listings online.

Alternatively, driving around the area you want to live in to see if any homes are for sale. However, either step is irrelevant if you do not know what you want. For example, you need to know your comfortable price range to avoid looking at over-priced housing.

Another assumption is the available amount to spend on a home is the amount a bank lends out. That is not necessarily true. Consider your current financial situation, like your employment stability and income level. The cost of the initial purchase is not the only factor. If you buy a home at the top of your budget, you have no money left over.

It is important to make allowances for expenses like monthly utility costs and initial moving costs. Check out the following topics to assist in your search for affordable housing.

How to Check Your Own Finances: The Credit Score

Your credit history and your credit score directly impact your ability to get a home loan. A lender reviews your credit history and score to determine if a loan is possible. If it is possible, your credit score affects the size of the loan. Therefore, the price range of homes you can afford is affected.

Credit-related issues to cause negative fluctuations in your credit score include:

  • High amount of current debt.
  • History of missing credit card or other credit-related payments.
  • Errors on your credit report.

If there are errors on your credit report, it is in your best interest to get them corrected quickly. Any new debts you acquire during your home loan application problems also adversely affect the home buying process.

If possible, purchase your home before applying for additional credit cards. Also, avoid applying for other loans, such as vehicle loans, until you finish purchasing your new home.

Learn About Your Debt-to-Income Ratio

The debt-to-income ratio you have is the next topic a lender is interested in. The ratio is how much income you have each month versus how much you need to use to pay off your debts. If your debt-to-income ratio is under 36 percent, you are more likely to qualify for a home loan.

Examples of examined debts include:

  • Rent or other home-related expenses.
  • Credit card debt.
  • Student loans.
  • Vehicle loans.
  • Other personal loans.

Before buying a home, understand your own monthly spending habits. Assessing and, if necessary, altering those habits allows you to make sure you affording a new home is realistically obtainable.

Ideally, save at least three percent of the home purchase cost for a down payment. In some cases, your lender may require you to pay up to 20 percent. Prepare financially for other expenses associated with maintaining your new home.

What You Can Afford, According to Lenders

Your lender uses a standard set of rules to determine the size of your home loan. The rule of 28 is one such regulation. It states up to 28 percent of your gross income each month is available for housing expenses. If your expenditures are higher, you are considered a poor loan risk.

Another rule, the back-end ratio, states you can only use up to 36 percent of your monthly gross income to pay down debts. Otherwise, you are not a good home loan candidate. However, the back-end ratio rule varies between lenders, so yours may allow a higher percentage.

Variation exists based on the type of home loan you purchase. For example, the monthly payment for an FHA home loan is typically capped at 31 percent of your gross monthly income.

However, some exceptions do exist. You will want to check with several lenders before finding an agreement suitable to your budget and credit history.

Learn About Mortgages

A mortgage is much like any other personal loan you get. You must pay portions of it back each month for a set period. That period varies but is often either 15 or 30 years. Over the course of the loan, the remaining balance accrues interest. Therefore, you pay back more than you initially borrow.

If you are a first-time home buyer, you may be eligible for a home purchasing grant. A grant, unlike a loan, does not require repayment. Federal and local housing grants are available. When applying for a home loan, complete the pre-approval process before house hunting.

Pre-approval requires the lender to run a credit check and verify your financial means to pay back a loan balance. The pre-approval process allows you to tell a homeowner exactly what you are authorized to borrow, giving the homeowner proof you can afford the home.

What are closing costs?

Closing costs are costs associated with purchasing a home besides the cost of the home itself. They are one-time fees you must pay. For example, your lender may charge application fees. Any hired attorneys or insurance and tax fees must be paid.

It is best to budget and additional amount equal to five percent of the home value to cover closing costs. Often, they are lower than five percent, but it is better to save too much than not enough.

Learn About Other Homeownership Costs

When you rent an apartment or home, you have minimal responsibilities. However, as a homeowner, all responsibilities relating to home maintenance fall to you.

It costs approximately $9,000 annually to maintain a home, especially if you are a member of a homeowner’s association (HOA). Annual homeownership costs include:

  • HOA fees.
  • Home repairs.
  • Tax payments.

Certain homeownership costs, including HOA fees, are not tax deductible. Purchasing a home without a HOA membership reduces those fees. It is possible to reduce home ownership costs by upgrading your home.

For example, utility bills in your new home may far surpass the utility payments in your apartments. Some increases are unavoidable because most homes are much larger than apartments. However, one-time expenses like solar panel installation or water heater replacements quickly reduce your ongoing utility costs.