Transcript: Determining Your Price Range
One of the first questions many homebuyers ask is, how much can I afford?
Buying a home is one of the biggest financial decisions you’ll make, and you will want to stay within your budget.
Many factors affect the price range you should consider, including the size of your down payment and the loan amount you may qualify for, the types of loan options available to you, your current debts and credit history, and the property value of the home you are considering.
Your lender wants you to be a successful homeowner, and so to assess whether you qualify for a mortgage large enough for the home you want, he or she will consider your entire financial picture.
First, lenders want to know that you have a source of income to make monthly mortgage payments. Income can come from primary, secondary, and part-time jobs, as well as overtime, bonuses, and commissions.
You may use other sources of income if you want them considered for payment — including retirement or veteran’s benefits, disability payments, alimony, child support, and rental or investment income — provided they can be verified as stable, reliable, and likely to continue for at least three years.
Your lender will also examine your current debts, payment habits, credit history, and credit score. They want to confirm that you pay your bills, loans, credit cards and other debt on time and that you don’t have excessive levels of outstanding debt.
You’ll Pay More Without A Minimum 20% Down Payment
Experts continue to encourage buyers to save a down payment of at least 20% before applying for a mortgage. It makes sense, as the larger your down payment, the smaller your mortgage and the less interest you’ll pay over the life of your loan. However, with the rise of FHA loans, which require as little as 3.5% down, and VA loans, which may not need any down payment, many buyers wonder whether a 20% down payment is as important as it used to be.
Keep in mind that you must pay private mortgage insurance if you put less than 20% down on a conventional loan. PMI covers the lender if you stop paying your mortgage and default on your loan. The yearly cost of PMI is about 1% of your outstanding loan balance and is added to your monthly mortgage payment. You can request to have PMI removed once your outstanding balance reaches 80% of the original loan amount. You also might not realize that applicants with smaller down payments usually have a higher interest rate. A small down payment might let you enter the homeowner market sooner, but it can cost you in the long run.
Can I Get Approved For A Mortgage
Most mortgage applicants are not perfect, and many wonder if they can even get approved for a mortgage.
Home buyers have three levers to pull to increase their chances of a mortgage approval: income and debts, credit score, and assets.
When youre strong in all three categories, youre more than likely to be approved for a mortgage.
If youre weak in one area but strong in others, you still stand a good chance of approval. The rules are often flexible and you wont know if youre qualified until you apply.
Heres how to stack the odds in your favor.
In this article
Recommended Reading: What Salary Is Required For A Mortgage
Shop Around Among Different Lenders
While these factors are considered by all mortgage lenders, different lenders do have different rules for who exactly can qualify for financing.
Be sure to explore all of your options for different kinds of loans and to shop around among mortgage lenders so you can find a loan you can qualify for at the best rate possible given your financial situation.
How Long Does It Take To Get Pre
You can typically expect to get pre-qualified in a day or two, sometimes less. Depending on the lender, pre-qualification can happen in person, over the phone or online.
More from NerdWallet:
NerdWallet subscribes to the 28/36 rule of thumb, which means that monthly home-related expenses shouldnt be more than 28% of your gross income, and all of your monthly debts shouldnt account for more than 36% of your gross income.
Using the guideline that your home-related expensesshouldnt be more than 28% of your gross income, you should try to keep your monthly mortgage payment under $4,666 if you have a household income of $200,000 a year. If your monthly debts plus $4,666 are greater than 36% of your gross income, youll either need to reduce your monthly debts, put down a larger down payment or set your sights on a lower-priced home.
There are so many elements at play that can determine home affordability, and everyones financial circumstances are unique. NerdWallets mortgage payment calculator can help you determine what your monthly payments would be if you bought a $400,000 home, and it shows how this figure changes based on factors like your down payment and property taxes. Ideally, this monthly payment should be less than 28% of your gross income.
There are so many elements at play that can determine home affordability, and everyones financial circumstances are unique. NerdWallets
You May Like: What Is Rocket Mortgage Fieldhouse
Mortgage Loan Preapproval And Loan Prequalification
After basic calculations have been done and a financial statement has been completed, the borrower can ask the lender for a prequalification letter. What the prequalification letter states is that loan approval is likely based on credit history and income. Prequalifying lets the borrower know exactly how much can be borrowed and how much will be needed for a down payment.
However, prequalification may not be sufficient in some situations. The borrower wants to be preapproved because it means that a specific loan amount is guaranteed. It is more binding and it means the lender has already performed a credit check and evaluated the financial situation, rather than rely on the borrowers own statements like what is done in prequalification. Preapproval means the lender will actually loan the money after an appraisal of the property and a purchase contract and title report has been drawn up.
How The Limits Work
There are 2 types of limit:
- Loan-to-value is based on the ratio of the size of the loan to the value of the home you want to buy
- Loan-to-income is based on ratio of the size of the loan to the income of the borrower
In general, you will have to meet both of these limits for your mortgage tomeet the Central Banks requirements. The lender must also assess each loanapplication on a case-by-case basis see Assessment by the lenderbelow. The regulations do allow lenders to be flexible in some cases seebelow.
Also Check: Can I Get A Mortgage Without Tax Returns
Jumbo Mortgage Pros And Cons
With every mortgage product, there are several things to consider. There is no one-size-fits-all product, and a jumbo loan may or may not be your best option. To help you decide, here are some points both for and against going with a jumbo loan for your financing needs.
- The main benefit of a jumbo loan is increased funding. For some borrowers, it may even be their only option if they want to buy in an area with higher-than-average home prices.
- Lenders are more selective when approving jumbo mortgage loans, often requiring higher credit scores, higher down payments and lower debt-to-income ratios.
- Closing may take longer than with a conventional loan due to the stricter vetting process for properties.
- Some lenders may require you have up to a year of mortgage payments in your cash reserves.
- They don’t qualify for federal programs.
Can You Get A Mortgage Without A Job
Yes, itâs possible to get a mortgage without a job as long as you can prove to the lender that you can repay the loan. For example, you could qualify if you have a large amount saved in cash reserves, have other sources of income , or apply with a co-signer who agrees to share responsibility for the loan.
However, keep in mind that lenders generally consider borrowers without consistent employment to be riskier investments. Because of this, you could end up with a higher interest rate and shorter repayment term, and you might not be able to borrow as much as youâd like. The lender could also require you to make a larger down payment.
Don’t Miss: How To Apply For A Mortgage Loan
When To Get A Mortgage Preapproval
The best time to get a mortgage preapproval is before you start looking for a home. If you dont, and you find a home you love, itll likely be too late to start the preapproval process if you want a chance to make an offer. As soon as you know youre serious about buying a home that includes getting your finances in home-buying shape you should apply for a preapproval.
If youre following mortgage rates, you can to determine the right time to strike on your mortgage with our daily rate trends.
How Long Does It Take To Get Preapproved
Depending on the mortgage lender you work with and whether you qualify, you could get a preapproval in as little as one business day, but it usually takes a few days or even a week to receive and, if you have to undergo an income audit or other verifications, it can take longer than that. In general, if you have your paperwork in order and your credit and finances look good, its possible to get a preapproval quickly.
Don’t Miss: Is It Good To Pay Off Mortgage
What To Do If You Cant Get Preapproved
If you cant get a preapproval, ask the lender why you were denied. If its an issue you can remedy, like an error on your credit report thats causing the lender to reject your application, you can address that right away and seek a preapproval again when its resolved.
If you credit score is too low or other financial roadblocks prevent you from being preapproved, you can work to improve those areas, too. Raise your score by making payments on time and paying down your debt load, for example, or lower your debt ratio by finding a way to increase your income. Depending on your situation, this could take time, but itll go a long way.
Some lenders have very stringent qualifying criteria, so another option is to work with a different, more flexible lender. If youre an account holder with a local bank or member of a credit union, these institutions might be more willing to work with you to get you preapproved.
The Value And Condition Of The Home
Finally, lenders want to make sure the home you’re buying is in good condition and is worth what you’re paying for it. Typically, a home inspection and home appraisal are both required to ensure the lender isn’t giving you money to enter into a bad real estate deal.
If the home inspection reveals major problems, the issues may need to be fixed before the loan can close. And the appraised value of the home determines how much the lender will allow you to borrow.
If you want to pay $150,000 for a house that appraises only for $100,000, the lender won’t lend to you based on the full amount. They’ll lend you a percentage of the $100,000 appraised value — and you’d need to come up with not only the down payment but also the extra $50,000 you agreed to pay.
If a home appraises for less than you’ve offered for it, you’ll usually want to negotiate the price down or walk away from the transaction as there’s no reason to overpay for real estate. Your purchase agreement should have a clause in it specifying that you can walk away from the transaction without penalty if you can’t secure financing.
Recommended Reading: Is An All In One Mortgage A Good Idea
Can I Get A Coe In Any Other Situations
You may be able to get a COE if you meet at least one of these requirements.
At least one of these must be true:
- Youre a U.S. citizen who served in the Armed Forces of a government allied with the United States in World War II, or
- You served as a member in certain organizations
These roles in organizations can include:
- Public Health Service officer
- Cadet at the United States Military, Air Force, or Coast Guard Academy
- Midshipman at the United States Naval Academy
- Officer of the National Oceanic & Atmospheric Administration
- Merchant seaman during World War II
Checking Your Credit Report
A potential lender will look at your credit report before approving you for a mortgage. Before you start shopping around for a mortgage, order a copy of your credit report. Make sure it doesnt contain any errors.
If you dont have a good credit score, the mortgage lender may:
- refuse to approve your mortgage
- only consider your application if you have a large down payment
- require that someone co-sign with you on the mortgage
- require that you get mortgage loan insurance even if you have a down payment of 20% or more
Recommended Reading: How Can You Pay Your Mortgage With A Credit Card
Can You Borrow With Your Current Income
Though you may feel that your finances are ready for a new home, the bank may not feel the same way. Mortgage lenders use a complex set of criteria to determine whether you qualify for a home loan and how much you qualify for, including your income, the price of the home, and your other debts.
The pre-qualification process can provide you with a pretty good idea of how much home lenders think you can afford given your current salary, but you can also come up with some figures on your own by learning the criteria that lenders use to evaluate you.
What You Should Know About Jefferson County Fl
Before purchasing a home, you must research and plan. This research tells you more about the home prices in the area. It also gives you an estimate of the minimum or maximum amount you should have to purchase a property in your most preferred town/city or community.
If you want to buy a property in Jefferson County, you have many great options. Jefferson has plenty of residential suburbs, towns, and neighborhoods you can choose from. We have covered this and more below.
Also Check: Rocket Mortgage Loan Types
Read Also: Why A 30 Year Mortgage Is Better
Can You Get A Home Loan With A Low Income
While it might be harder to get a mortgage with a low income, itâs definitely possible. There are several types of loans specifically geared toward low-income borrowers, such as FHA, USDA and VA loans as well as Fannie Mae HomeReady loans and Freddie Mac Home Possible loans.
These loan programs typically require little to no down payment and often accept lower credit scores.
Improve Your Credit Score
That brings us to the next step. Unless your credit is in perfect shape , youâll want to spend some time getting it cleaned up.
Your credit reports donât contain your credit scores. Fortunately, itâs fairly easy to get your credit score for free. For example, many major credit card issuers provide your FICO score for free. Other websites allow you to see your VantageScore, though you should note this scoring model is used much less often than FICO by lenders and may differ from your FICO score by quite a few points.
When it comes to the credit score needed for a mortgage, most conventional lenders consider 620 to 640 to be the minimum. Some government-backed loans will allow you to borrow with a credit score as low as 500, provided you meet certain other criteria. However, the higher your score, the more affordable your loan will likely be.
One of the best ways to improve your credit score is to make all your debt payments on time and in full. Payment historyâthe most heavily weighted factorâaccounts for 35% of your credit score. The amount of debt you owe in relation to the total amount of credit extended to you contributes to another 30% of your score, so itâs best to keep your debt as low as possible.
Finally, avoid making any major purchases on credit or open new lines of credit for a few months before you plan to apply for a mortgage, as this can negatively affect the average length of your credit history and the number of hard inquiries.
Also Check: What’s A Good Credit Score For Mortgage
Calculating Your Mortgage Payment
This mortgage calculator can answer some of the most challenging questions in the home search journey, short of talking to a lender, including what kind of payment can I afford? How much do I need to make to afford a $500,000 home? And how much can I qualify for with my current income?
We’re able to do this by not only considering the loan amount and interest rate but the additional factors that affect your ability to qualify for a mortgage. We include your other debts and liabilities that have to be paid each month and costs like taxes and homeowner’s insurance that are part of the monthly mortgage payment. Doing so makes it easy to see how changes in costs and mortgage rates impact the home you can afford.
While determining mortgage size with a calculator is an essential step, it won’t be as accurate as talking to a lender. Get pre-approved with a lender today for exact numbers on what you can afford.
How To Use The Pre
Our pre-qualification calculator can provide an idea of what to expect out of the process before you talk to a lender. Filling out this calculator will not pre-qualify you for a mortgage. If youre ready to get pre-qualified, you can reach out to one of our recommended lenders to start the process.
To use our calculator, provide the following information:
Enter your annual income before taxes.
Enter the term of the mortgage youre considering.
Select your credit score range.
Tell us about your employment status.
Tell us if you have a down payment.
Tell us about past foreclosures or bankruptcy.
Enter your monthly recurring debt payments.
After completing each required field, youll see the loan amount we recommend, as well as a higher loan amount. We show two pre-qualification amounts because:
Different loans have different debt-to-income requirements. For example, conventional loans usually have stricter DTI requirements than FHA loans, insured by the Federal Housing Administration.
Its not always smart to borrow 100% of what a lender offers. The maximum loan amount is the most the lender is willing to loan you, not what makes sense for your budget. A higher loan amount will mean a higher monthly mortgage payment. Borrowing too much could make it difficult to ride unexpected financial bumps, such as a job loss or a big medical bill.
Also Check: How Much A Month Is A 150k Mortgage