Affording A House | Can You Afford That House?
Looking at home and asking yourself “Can I afford that house?” We are here to help you figure if you can afford a house!
Verify your mortgage eligibility (Apr 24th, 2024)Do you know that there are three numbers that determine how much home you can afford? In this video, I'm going to show you how to get preapproved for a mortgage and why these three numbers matter. We'll look at your credit score, down payment, and debt-to-income ratio so you know how to get into the right home for you.
Three Numbers That Matter For Affording A House
When it comes to getting a lender’s approval to buy or refinance a home, there are three numbers that matter the most. The first is your credit score, which is your overall debt profile. Number two is your loan to value ratio, which is the down payment. How much money do you have, and how much are you willing to invest in this home for your mortgage?
Verify your mortgage eligibility (Apr 24th, 2024)Number three is your debt-to-income ratio. This is your income divided by 12 months, which creates your gross monthly income. Once you decide how much of your monthly income you want to allocate towards debt, we can determine your monthly mortgage payment and your purchase price.
Your income minus your debt creates this debt-to-income ratio and really determines how much you can afford. These numbers affect the ability to qualify for a mortgage and how much it’s going to ultimately cost you.
The Importance Of Credit Score When Affording a House
Verify your mortgage eligibility (Apr 24th, 2024)Let’s start with credit scores. A big question from clients is why credit scores matter when getting a mortgage. Your credit score is a three-digit number that measures your borrowing history. There are three main credit bureaus that each calculate their own credit score for you based on your payment history, how much debt you have, your credit card limit usage, etc.
So why does it matter? Your credit score helps mortgage lenders evaluate your likelihood of paying back the loan. It’s very simple: the higher your credit score, the better the mortgage credit terms you’re going to be offered. A higher credit score saves you money. Technically, you can get a loan with a credit score as low as 620 - or even lower. However, you’re going to have a ton of hurdles to jump over during the mortgage approval process. Quite honestly, it limits what kind of loans you can get.
If you’re buying a house or refinancing in the next few months, begin with boosting your credit score up now so that you can reap the benefits This little tip saves thousands of dollars for our clients every year. We call a credit report audit with each client that we have to make sure that we can get them into that good or excellent credit score range.
Verify your mortgage eligibility (Apr 24th, 2024)Your Loan To Value Ratio
How much money do you need to buy a house? There is the downpayment, but don’t forget those closing costs. Here at Friel Good Mortgage, we use an exercise with clients called the "Oh Shit" number. Imagine you’re under contract on a home and the purchase price is a little bit higher than you’re comfortable with. You can’t sleep, you can’t eat, you’re stressed out. It’s brutal, right? So write that number down.
The loan to value ratio is the way to measure how much equity you have in your home or a way to determine the loan to value for the mortgage transaction. For a home purchase, loan programs have minimum downpayment requirements. Your exact down payment depends on things like whether you’re a first-time homebuyer and if it's your primary residence, second home, or maybe an investment property.
Verify your mortgage eligibility (Apr 24th, 2024)Other factors like property type and unit count require more money down. For primary residence transactions, you can get a conventional loan with 3-5% down, although first-time homebuyers can put as little as 3% down. For an FHA loan it’s 3.5%, while a VA loan requires 0% down. There are also jumbo loans that require 3.5-50%, depending on how much you want to borrow.
Running The Numbers
Each one of these loan products has its perks, benefits, and drawbacks as well. If you buy a second home, you’re going to need 10% down. For you investors out there, you’ll have to put more money down for the loan to value ratio.
Verify your mortgage eligibility (Apr 24th, 2024)Keep in mind that the key takeaway with the downpayment is that the more money you have available, the more leeway when it comes to figuring out your eligibility for a loan program. Let's look at an example. Say you get a primary residence conventional loan with 10% down. With a $500,000 purchase price, the loan to value ratio would be a 90% LTV loan.
Debt-To-Income Ratio
Now let's talk about the debt-to-income ratio. DTI is a percentage that helps lenders understand how much you can afford to pay for a mortgage each month, given your existing monthly debt payments. Lenders are going to add up all those payments to find out what your housing payment is going to be on this new home, and then divide that by your gross monthly income. This is how much money you earned before all your taxes and expenses are taken out.
Verify your mortgage eligibility (Apr 24th, 2024)Why does this matter? Because it helps your lender determine what your ability to repay the loan is. They want their money back over time. A high debt-to-income ratio is the number one reason mortgage applications get rejected or denied. Most lenders are typically going to offer credit-worthy borrowers a DTI as high as about 45%.
Here at Friel Good Mortgage, however, we have lending partners that offer loans up to 50% or higher if you’re very, very creditworthy. While the higher the credit score the better, I don’t like to max my client’s budget out just on debt. Keep in mind, the lower your DTI, the easier it is to qualify for a mortgage.
I'm Here To Help
Verify your mortgage eligibility (Apr 24th, 2024)I hope this helps you understand the three most important numbers to get preapproved for a mortgage. If you’re thinking about buying or selling a property, we have all the information you need. We have a library of educational videos filled with information that makes you incredibly savvy inside the game of real estate mortgage.
Click here for our instant pre-qualification certificate and free access to all of our mortgage calculators. If you have any questions, feel free to reach out to me and I'll be happy to help. Don't forget to subscribe to the channel for more information about mortgages and real estate, and stay tuned to see what I feature next!
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