Financing Basics
Selecting the best financing package available is as important as finding a home that meets your needs. In fact, determining how much you can afford before you begin your home search will save you valuable time in choosing the right home in the right neighborhood.
Financing Basics
- There are three factors to consider in figuring how much you can afford: down payment, ability to qualify for a mortgage and closing costs.
- Consider your downpayment. The most financially advantageous loans require a down payment between 10 and 20 percent of the home price. If you are able to make a down payment of 25 percent or more, you may qualify for special mortgage programs offered by a variety of lenders.
- Most lenders require that your monthly mortgage payment, including principal, interest, taxes and insurance, should not exceed 28% of your gross monthly income. They also look for your total installment debt (regular scheduled payments of 6-months or longer), including the proposed monthly mortgage payment on your new loan, to not exceed 36% of your gross monthly income. In addition to your gross monthly income, lenders review your employment history, stability and potential for increasing your income. They also evaluate any additional income, such as bonuses, commissions and child support.
- A credit report is also requested, to verify your debt repayment, outstanding debt and available credit. Assets are also calculated, including checking and savings account balances, CDs, stocks and bonds.
- Avoiding any late payments on credit accounts and limiting your credit purchases helps keep your credit report in good standing. If you have items on your credit report that could negatively influence your ability to secure a mortgage, be prepared to explain each situation in writing. You should also consider delaying major purchases until after you’ve moved into your new home.
- Closing costs typically range between 2 and 5 percent of your loan amount. These fees are due in cash at the time of closing, or sometimes can be included in the loan.
- Taking the time to pre-qualify for a mortgage before you begin your home search will put you in a better negotiating position. This is because the seller is assured that the transaction will not be delayed while you secure financing. If you would like assistance in determining how much house you can afford or learn about financing options, please contact Judy for more information.
