This may help
How much home can you afford? This estimation calculator can step you through the process.
Mortgage Pre-Qualifying Calculator
Keep in mind: Only a licensed mortgage counselor (a real-live person) can give you a legal letter of pre-qualification.
How much home can you buy?
There is an often-quoted rule of thumb: You can afford a house that costs up to 2½ times your annual gross income (that is, your income before taxes, Medicare and social security are deducted). If you are buying a house with someone else, you can also consider your co-purchaser's annual gross income to help you decide just how expensive a home you can buy.
Remember, your debts and credit report — as well as your co-purchaser's — will be considered in determining how much you can borrow. Since what you can borrow reflects what you can buy, make sure your credit history (as well as your co-purchaser's) is up to snuff.
Based upon the simple rule of thumb of 2½ times your annual gross (before-tax) income, if you and your co-purchaser together have a combined annual income totaling $40,000, you can expect to buy a home priced at no more than $100,000. That's put rather simply; keep in mind that your buying power will ultimately depend on two things:
- How much you have available for the down payment
- How much a financial institution will agree to lend you
Your down payment
Unlike established homeowners who can rely on their equity — money in a property they already own — a first-time homebuyer will have to count on his or her savings as the principal resource for a down payment. If you don't have any savings, you shouldn't play any shell games with your credit cards, such as making a cash-advance to yourself for the amount needed for a down payment. The outcome will only affect your debt-to-income ratio, and furthermore, the interest you pay on the credit card will probably be more than the interest you would pay for the home mortgage, which would cost you even more in interest and fees.
The price you can afford to pay for a house may very well be limited by your ability to come up with the cash for the required down payment, and the closing costs. However, with preparation and planning, you may find that setting aside funds earmarked specifically for a down payment on a regular basis will compound nicely if you place them in short-term interest bearing accounts that you can draw on when needed.
If this is not a realistic option, because you just have to have that house for sale down the street before it goes off the market, then you may want to consider a lease-purchase mortgage loan. Many lease-purchase loans allow first-time and low- to medium-income homebuyers a chance to lease a home from a non-profit organization, with part of your "rent" earmarked for a savings account that accumulates funds for your eventual down payment. This is further discussed here.
Apart from your down payment, the other major factor limiting your price range will be how much you can actually borrow. When you apply for a mortgage, the lender will consider several factors in determining how large of a loan to grant you:
- your current earnings
- your existing debt
- your credit history
- your debt-to-income ratio
Your monthly costs (including mortgage payments, property taxes, homeowner's insurance, and any condo or co-op fees) should total no more than 28-percent of your monthly gross (before-tax) income.
Your monthly housing costs PLUS other long-term debts should total no more than 36-percent of your monthly gross income.
This may help
Use this calculator to estimate your maximum mortgage, and see how different factors can affect how much you can borrow.
Maximum Mortgage Calculator
Keep in mind: There are other variables involved in determining your housing costs, chief of these being your credit rating. An estimation calculator doesn't know your credit rating, until your mortgage counselor factors it in.
Basically, what lenders want to see is a demonstration by you that you can spend no more than about one-fourth of your income (28-percent) on housing and about one-third of your income (36-percent) on your total indebtedness. Lenders feel that if they follow these guidelines, homeowners will be able to pay off their mortgages fairly comfortably and with much less worry about loan defaults and foreclosures. (These guidelines can be exceeded under certain circumstances, such as a good credit history and a larger down payment. More on that later.)
Low-income and moderate-income homebuyers may qualify for loan programs with different qualifying guidelines: 33-percent of gross income on housing expenses and 38-percent on total indebtedness. The result is that borrowers don't need as much in income to qualify for certain types of mortgages, which is further discussed here.
How much mortgage can you qualify for?
When you apply for a mortgage, the lender will use all the relevant data:
- your income
- your existing debt
- the purchase price of the house
- your down payment
- the interest rate of the loan
- cost of property taxes and insurance
Note that "qualifying" for a loan is only the first step to getting "approved" for the loan. The qualification process determines how large a mortgage you are eligible for, providing your loan application for a specific house is ultimately approved. You can get pre-qualified for a loan without having a particular house in mind, and doing so will give you a better idea of what kind of home you can afford before you even start looking for a home.