Bottom Line: Home Affordability Begins With These Key Factors
Dont let rising home prices automatically scare you away. Being able to purchase a property starts with these questions:
Do you pay your bills on time? A history of no late payments will make you look good in the eyes of any lender. Theyll know that they can expect to receive your mortgage payment each month when its due.
Do you have proof of steady income? If you have a steady job that deposits a similar amount into your checking account every two weeks, youre in good shape. Lenders will evaluate your bank accounts, review recent pay stubs and look at your tax forms. If youre self-employed or earn irregular income, youll need to show even more evidence of your earnings likely the past two years of tax returns.
Do you have a low debt-to-income ratio? If youre earning a lot more money than youre paying back for other debt, youre in a good position.
Whats the best mortgage rate you can get? The lower your rate, the more youll save on interest payments. The good news: If you answered yes to the previous three questions, youll likely qualify for the lowest rates a lender can offer.
What To Do If A Lender Refuses Your Mortgage Application
A lender could refuse you for a mortgage even if youve been preapproved.
Before a lender approves your loan, theyll verify that the property you want meets certain standards. These standards will vary from lender to lender.
Each lender sets their own lending guidelines and policies. A lender may refuse to grant you a mortgage if you have a poor credit history. There may be other reasons. If you dont get a mortgage, ask your lender about other options available to you.
Other options may include:
- approving you for a lower mortgage amount
- charging you a higher interest rate on the mortgage
- requiring that you provide a larger down payment
- requiring that someone co-sign with you on the mortgage
These Rules Might Not Apply Depending On Where You Live
The “three times your salary” rule and the “less than 30% of your monthly income” rule are both helpful guidelines. But the amount you feel comfortable spending on your mortgage payments could differ depending on where you live and your other financial goals.
You should also consider what the market is like where you live, says Reyes. The “three times your salary” rule might not be realistic for people who live in areas with high cost of living.
If it seems like you might need to take out a bigger mortgage to afford to buy a home, Reyes recommends that you make sure you’re in good financial standing in other areas of your life. It’s important to have a significant emergency savings set aside to make up for the fact that your budget will be stretched a little thin. You should also have ample retirement savings and a separate stash of cash to cover your move-in and closing costs.
But bigger mortgages are not always desirable, explains Reyes. If your mortgage represents too big of a chunk of your income, a lender might charge higher interest rates and other fees to compensate for the higher risk you could default.
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How Do I Get Pre
You may know the house you want, but unless you have experience buying one, you may not know whether you can afford it. That is where the mortgage pre-approval process comes in.
You visit a bank or mortgage lender, give them information about your income and expenses, they do the math and tell you how big a mortgage you are pre-approved for.
Your pre-approval is not binding. You dont have to take a loan from that lender and the lender doesnt have to give you a loan. It just means that you qualify to borrow the amount they arrived at to start the process.
That amount is crucial to a seller, who knows whether youre really qualified to make an offer on their home. It also tells you what neighborhood to look for your dream house.
Things That Could Change Your Home Affordability Calculator Results
Your credit score
Your measures your current and past history of managing credit. A credit score above 740 usually helps you snag the lowest rate and monthly payment, which means you can potentially afford a more expensive home.
Your monthly income
Lenders look for a stable monthly income, which means a salary or hourly wage will give you a home affordability number you can count on. If youre self-employed or receive variable commission income, youll need to average out your income based on your tax returns for the past two years.
Your total monthly debt
Lenders take a look at how much debt you have now, and how much youll have with your new mortgage payment. They take both of these sums and divide them by your gross monthly income to determine two types of DTI ratios:
- Your front-end DTI ratio. This figure divides your new house payment by your income, and most lenders prefer that it doesnt exceed 28%.
- Your back-end DTI ratio. Lenders add all your debt to your new house payment and then divide it by your income, and most prefer a DTI ratio of about 43%.
Your loan term
Youll be able to afford a bigger home with a longer repayment term, such as 30 years. However, a shorter term can save you thousands in interest charges, if the higher payment doesnt strain your monthly budget.
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Show The Seller Youre Making A Serious Offer
Youve probably heard of earnest money, but maybe you arent quite sure what it is. Think of it as your security deposit.
Earnest money tells the seller youre serious about buying their home. If you follow through with the contract, the money will be applied to your purchase. If you break the terms of the contract, you risk forfeiting the money to the seller.
There is no minimum requirement for earnest money. Youll negotiate an amount with the seller. Then, within a few days of the seller accepting your offer, youll deposit the earnest money into an escrow account.
What’s The Minimum Down Payment
Another big factor affecting your monthly payment amount is how much of a down payment you make. Most experts recommend aiming for 20%, but many mortgage programs don’t require you to pay that much. Instead, most mortgages only require you to put as little as 3% down .
In December 2021, the median home price was $377,700. If you made the minimum down payment of 3% at that price, you’d need to pay $11,331 upfront, and thus your actual loan size would be $366,369.
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How Does The Amount Of My Down Payment Impact How Much House I Can Afford
The down payment is an essential component of affordability. For example, if we include down payment on that $70,000 annual salary, your home budget shrinks to $275,000 with a down payment of 10 percent . By making a larger down payment, you would reduce the loan-to-value ratio, which makes a difference in how your lender looks at you in terms of risk.
Bankrates mortgage calculator can help you explore how different purchase prices, interest rates and minimum down payment amounts impact your monthly payments. And dont forget to think about the potential for mortgage insurance premiums to impact your budget. If you make a down payment of less than 20 percent on a conventional loan, youll need to pay for private mortgage insurance, or PMI.
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What’s Your Interest Rate
Next, your lender will figure out what sort of interest rate you can qualify for, because that’s one of the most important factors affecting your monthly payment amount.
Your interest rate is determined by a few things, chiefly your credit score. If you have good credit, you’ll generally qualify for the lowest interest rates, and that means a bigger potential loan. Some types of mortgages are cheaper than others, too.
In December 2021, the average 30-year U.S. Department of Veterans Affairs loan carried an interest rate of 2.99%, according to mortgage application processing software company Ellie Mae. The average 30-year Federal Housing Administration loan, by contrast, was much more expensive, with an average interest rate of 3.39%.
Can I Get A Mortgage On $20k A Year
Yes, itâs possible to get a mortgage on 20k a year. Assuming a loan term of 30 years with an interest rate of 5%, you may qualify for a home up to $74,066 and have a monthly payment of $467. Head on over to our mortgage qualifying calculator to determine what those amounts will be with different interest rates and loan terms.
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How Much Do You Have For A Down Payment
Your down payment affects the amount you can borrow to buy a home and the size of your payments. This will impact your monthly budget.
You must have at least 5% for a down payment if the home purchase price is less than $500,000.
If the home purchase price is between $500,000 and $999,999.99, you must have at least 5% for the first $500,000 and 10% for the remaining amount.
For home prices $1 million or over, the down payment must be 20%.
If you are a first-time home buyer, you can borrow up to $35,000 from your RSP towards your down payment.1
1. First time home buyers can withdraw up to $35,000, in a calendar year, from their RSPs for a home purchase . They then have 15 years to repay their RSP . Find out more about the RSP Home Buyers’ Plan.
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Should I Get Preapproved For A Mortgage Before Looking
Getting a mortgage preapproval before looking for homes doesnt just give you confidence. Knowing your qualifications have been checked in advance also gives a seller comfort when dealing with you. They know your offer isnt likely to fall through if everything has been verified by an underwriting team.
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What Does This Possibly Mean For Me
Based on your income, expenses, and the loan you selected, the amount above represents the most you will likely be comfortably able to pay for a home. This assumes that your total costs for your loan payments , taxes, and insurance should not be higher than 45% of your monthly income. Also, remember that you’ll have additional homeownership costs that you may need to factor into your monthly budget, including insurance, association fees, and maintenance expenses.Mortgage insurance expenseswhich you may have to pay if your down payment is less than 20%are not included in this calculation. We suggest that all buyers get pre-qualified or pre-approved prior to starting their new home search.
You selected an adjustable rate mortgage or ARM. Based on your income, expenses, and the loan you selected, the amount above represents the most you can comfortably afford to pay for a home*. This assumes that your total costs for your loan payments , taxes, and insurance should not be higher than 45%. Also, remember that you’ll have additional homeownership costs that you may need to factor into your monthly budget, including insurance, association fees, and maintenance expenses. Mortgage insurance expenseswhich you may have to pay if your downpayment is less than 20%are not included in this calculation. We suggest that for all buyers to get pre-qualified prior to starting their new home search.
How Do I Use The Mortgage Qualifying Calculator
The mortgage qualifying calculator allows you to calculate the amount of mortgage you may qualify for in several ways. To select how you’d like to calculate, select one of the options from the drop-downs on “Calculate for.” Your options are:
- Total monthly payment: Calculates the total mortgage you may qualify for to hit a desired monthly payment.
- Annual income: Calculates the total mortgage you may qualify for based on your yearly income.
- Purchase price: Shows how much income you’d need to make to qualify for a mortgage at a specific purchase price.
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Youll Have An Idea Of How Much Money You Have To Work With
Buying a home is a significant investment of your money and time. This time investment only increases as competition in the housing market rises. This is precisely why having a mortgage pre-approval is essential before starting your search. By beginning the process with the knowledge of just how much money you can spend, you can keep your search realistic and give your real estate agent an appropriate price range.
Being well prepared with realistic expectations and a clear price range will save you time, eliminating homes that are out of your reach financially. Youâll also be able to give your real estate agent the information they need to find you a home that fits both your desired specifications and your budget.
Other Mortgage Requirements Changes Worth Knowing In 2022
There were some important changes that could affect your mortgage application in 2022.
New condo and co-op rules. After the collapse of a poorly maintained condo complex in 2021, Fannie Mae added additional requirements that bars any loans for condominium or cooperative units with significant deferred maintenance. The new requirements may result in additional hoops to jump through for condo or co-op buyers.
Self-employed borrower documents. Besides standard tax return requirements, self-employed borrowers will need to provide three months worth of business account statements, plus a profit and loss statement as additional proof of year-to-date earnings.
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Factors That Impact Affordability
When it comes to calculating affordability, your income, debts and down payment are primary factors. How much house you can afford is also dependent on the interest rate you get, because alower interest ratecould significantly lower your monthly mortgage payment. While your personal savings goals or spending habits can impact your affordability,getting pre-qualified for a home loancan help you determine a sensible housing budget.
Interest And Partial Principal
In the U.S. a partial amortization or balloon loan is one where the amount of monthly payments due are calculated over a certain term, but the outstanding balance on the principal is due at some point short of that term. In the UK, a partial repayment mortgage is quite common, especially where the original mortgage was investment-backed.
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How The Mortgage Pre
This mortgage pre-approval calculator gives you the opportunity to know in advance how much home financing you can qualify for. But please understand its a calculator only, and the official number will be determined by a mortgage lender.
In addition, the validity of the results youll get from this mortgage prequalification calculator will only be as good as the information you input. For that reason, be as accurate as you can be. If you inflate any information, like your annual income or your credit score range, you may get a higher loan amount, only to get a smaller pre-approval amount from an actual mortgage lender.
The mortgage pre-approval calculator is self-explanatory, but heres a general overview.
Be Prepared For Closing Costs
A long list of small closing costs can add up quickly. But dont despair. Your mortgage loan officer can help you figure out the best way to cover these costs. You may even be able to roll them into your mortgage.
Early in the loan process, youll get an itemized list of these costs. It will include standard expenses such as appraisal fees, title fees and the first year of your home insurance premium payments. Depending on your specific loan and state requirements, there will be other costs as well.
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How To Use The Maximum Mortgage Calculator
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