Perhaps the most important component throughout the home buying process is determining just how much you can afford to spend. When calculating this number, keep in mind that the principal cost of the home is just one of the many elements that have to be considered.
From closing costs to property taxes, and let’s not forget the furniture, it’s important to set aside a realistic budget. This way, you’ll have the flexibility to maintain your lifestyle, while also being able to comfortably pay your mortgage each month.
The 28% Rule of Thumb
More often than not, lenders will recommend that you allot no more than 28% of your gross monthly income towards your overall mortgage and utility payments. This includes electric, heat, gas, water and whatever other housing costs you accrue each month, on top of your principal loan payment. This number, while it may seem arbitrary, should provide you with enough room to pay off any other outstanding debts, while also leaving you with disposal income leftover that you can put towards savings and other everyday necessities.
Hidden Costs of owning a home may include:
• Ongoing utilities (heat, electric, gas, water, etc.) • Repairs and Replacements • HOA Fees if applicable (Homeowners Association) • Property Taxes
When factoring in your other monthly payments such as car loan, student loans, alimony and other applicable costs, the total should amount to around 36% of your total monthly income before taxes.
That being said, estimate the principal cost of the home that you’ll be able to afford each month by aiming to stay within 25% of your gross monthly income.
Example: $5,000 gross monthly income 5,000 x 25% (.25) = $1,250 Estimated Monthly mortgage payment=$1,250*
*Please note that this is strictly an estimated payment based off of a loose example.
Maintain an Open Line of Communication
If applying for a mortgage with a spouse or partner, it’s important that you’re transparent with one another about your overall income. Since this will be one of the determining factors used to secure your property, you don’t want to encounter any surprises that may impact what you’re able to afford.
Calculate Upfront Costs
When buying a home, you’ll more than likely be required to pay a sum of money upfront consisting of a down payment, mortgage premium or other closing costs. Typically, your upfront costs will amount to around 5% of your overall purchase price.
Closing costs cover a variety of expenses that you’ll be required to pay upfront.
• Appraisals • Insurance • Taxes • Property Inspections
Once we determine which loan best suit your needs, we can explore whether or not you qualify for any programs that offer financial assistance towards upfront costs, should they apply.
Examples of these programs include but are not limited to:
• VA Home Loan Program: No upfront payment required for qualifying home buyers • USDA Home Loan Program: Zero dollars down for all eligible individuals • FHA Home Loan Program: First time home buyers may be eligible to receive financial support from a family member in form of a gift, to help cover upfront costs.
Rates and Terms
Depending on which loan program you finance through, you’ll be offered interest rates that vary based on a few different factors.
Credit Score
One of the biggest components that may impact your rate is your credit score. Since buyers with lower credit scores are considered high risk, they may receive higher rates that ultimately inflate their overall costs.
A way to avoid this is by cleaning up your credit score prior to beginning the home buying process. This way, you can review your report to get an idea of any outstanding balances, debts or collections that you may want to settle before applying for a home loan.
Debt to Income Ratio (DTI)
Your DTI is another factor that may affect what rate you’re offered upon qualifying for a home loan. Before applying for your mortgage, it can help to pay off as much debt as you can to reduce the debt to income ratio. Not only will it relieve funds for you to put towards your new property, but it can also help secure more optimal interest rates.
Co-Signer
Of course, there may be circumstances where you’re unable secure premium rates. In these situations, you might begin to consider using a co-signer who can help you qualify for the loan you want.
However, while there are many advantages to a co-signer, it’s important to remain cognizant of any potential negatives. As a legal counterpart and co-owner of the property, choosing to sell the home will require this individual’s permission. Additionally, should they encounter financial circumstances such as bankruptcy or are sued, the home can be repossessed as it is considered an asset of theirs. Finally, any late payments towards the monthly mortgage will negatively impact your credit, as much as it will have an affect on theirs.
Electing to use a co-signer is between you and the participating third-party; which is why we’re here to provide you with all of the necessary guidance throughout your decision.