How Much House Can I Afford?
Once you determine that you would prefer to own rather than rent there are three basic considerations to determine what you can afford:
- How much money you have for a down payment
- The amount of loan you will qualify for
- The amount of closing costs
If you are able to put down 10 to 20 percent of the purchase price of the property as cash, you probably want a conventional loan.
If you have a small amount of money to use as a down payment, such as 5 percent or less, it is best to obtain a loan insured by the government such as the Federal Housing Administration and the Veterans Administration.
From a lender point of view, the more equity (your money) you have into the property, the less likely you are to default on your loan. For this reason, the interest rate is often lower when there is a larger down payment.
The lender will determine what amount you can qualify for based on your income, assets and debts.
Lenders will require documentation to determine length and stability of employment, credit history, source of funds for closing, source of income and qualifying ratios and the value and condition of the property.
Income and assets can be demonstrated by providing employment history, education, W-2 forms, employer verification, income tax returns, 1099s, checking account balances, savings account balances, stocks and bonds, certificates of deposit, other property, insurance policies and pension funds.
In most cases, a credit report will be required. The lender will need to know and verify balances and payment amounts on revolving lines of credit, short-term loans or long term loans. They will be concerned with payment history, as to whether it was timely or not. Should there be an isolated late payment, the lender may be lenient if it occurred for a valid reason, such as medical emergency. These items will need to be explained.
The lender will use ratios of income to expense to determine what amount of loan they will give to the buyer.
In addition to money for the down payment, the buyer will be expected to pay costs associated with the purchase. There are several services and products required for the purchase of a home. Usually, in the process of obtaining a loan the lender will require a credit report, appraisal, survey and wood destroying insect report. Additionally, you will be required to provide a hazard insurance policy paid one year in advance. Other costs will include, but not be limited to, legal fees for preparation of documents, title insurance premiums, recording fees, escrow fees, messenger service, copy fees, origination fees and flood certification fees.
When determining what amount you can afford, it is also necessary to take into account other expenses of owning a home. Whether within your loan payment or paid directly, you will pay taxes and insurance annually on your property. Additionally, you must take into consideration the expense of utilities and maintenance of the structure and equipment. These expenses will vary according to the type of home you choose.