How
expensive a home can you purchase?
An often quoted
rule of thumb says you can afford to buy a home that cost up to
two and a half times your annual gross income (before taxes).
If you are planning to buy a home with another person
(spouse, parent, adult, child, sibling), you can add their annual
gross income to yours to determine the price when buying a home.
Keep in mind that your buying partners credit history will
also be taken into consideration, and they will also be
responsible for repayment of the mortgage loan.
In the end buying a home comes down to two
things:
The next section will cover what resources
you can use for your down payment.
Use
worksheet 2 to help you calculate you available cash and assets.
Your
down payment
For first time homebuyers, the price of a
home is dictated by the amount of money they have put aside for a
down payment, since they haven’t built any equity.
If you haven’t been saving money to buy a home you may want to begin
putting money aside from every paycheck.
Your
borrowing power
Other than your down payment, the main
factor limiting the price of your house will be how much you can
borrow. When applying for a mortgage loan, the mortgage lender will
largely consider two factors in deciding how large a loan to allow
you:
Lender’s
qualifying guidelines
The
mortgage lender considers your debt-to-income ratio, which is a
comparison of your gross (pre-tax) income to housing and
non-housing expenses.
Non-housing expenses include such long-term
debts as car or student loan payments, alimony, or child support.
According
to the FHA, monthly mortgage payments when buying a home should be no more than 29%
of gross income, while the mortgage payment, combined with
non-housing expenses, 4 should total no more than 41% of income.
For
more information or to apply for a FHA
loan
The
lender also considers cash available for down payment and closing
costs, credit history, etc. when determining your maximum loan
amount.
Pre-qualifying
Pre-qualification is an informal way to
see how much you maybe able to borrow. You can be 'pre-qualified'
over the phone with no paperwork by telling a lender your income,
your long-term debts, and how large a down payment you can afford.
Without any obligation, this helps you arrive at a ballpark figure
of the amount you may have available to spend when buying a home. Use
worksheet 5 to pre qualify yourself.
Free mortgage loan pre qualifications for
the following types of mortgages available below:
Your
gross income.
All
these sources count as income, your gross income is all of your
income added up before taxes.
- Seasonal pay
- Child support
- Retirement pension payments
- Unemployment compensation
- VA benefits
- Military pay
- Social Security income
- Alimony
- Rent paid by family
- Part-time pay
- Overtime, and bonus pay also count as long as they are steady.
Use
worksheet 3 to find your gross monthly income.
Your
debt payments. Mortgage
lenders will also take into account your existing debt in
determining how large a mortgage you can apply for.
If monthly debt payments are too much for
your income level, this will decrease the amount you can borrow to
buy a house. For
every $60 of “excess debt”, you can expect about $6,000
reduction in the amount of mortgage you qualify for.
Consider paying off a portion of your debt in preparation
for buying a home if your debts are excessive. Use
worksheet 4 to determine your monthly debt payment.
Learn more about debt ratios for specific
types of mortgage loans by clicking on loan type below:
Your
credit record
A mortgage lender will order a credit check
to assess your request for a loan.
The credit report gives mortgage lenders record of debts
owed and duly repaid. Mortgage
lenders verify the amount of debt you currently have, as well as
the amount of credit available to you.
Learn more about credit qualifying
guidelines of various loan programs, click on the loan type below:
You can ask for your credit profile from a
“credit reporting agency”
CREDIT REPORTING COMPANIES
|
Company
Name
|
Phone
Number
|
|
Experian
|
1-888-524-3666
|
|
Equifax
|
1-800-685-1111
|
|
Trans
Union
|
1-800-916-8800
|
Below are some links to websites that allow
you to receive a
copy of your credit report online instantly.
Establishing
a credit history
If you do not have a traditional credit
record, it is still possible to set up a credit history that
illustrates payments made on credit card purchases, a car loan, or
a student loan. You can develop a nontraditional credit history by keeping a
record of these monthly payments:
Repairing
a bad credit report background
If your credit report has bad marks on it
or you are presently having credit problems, you may not be in a
position to buy a home until they are resolved.
Your record of
keeping current on your debt payments may be credible if your
credit problems are in the past.
By law, the most unfavorable credit information should be
dropped from your credit file after seven years, a bankruptcy
should be dropped after ten years.
Correcting
an erroneous credit profile
Sometimes credit reports are incorrect or
provide misleading picture of past credit problems that have since
been resolved.
If any errors appear on your credit report,
you will have the chance to get them fixed before applying for a
mortgage.
Below is a
company that offers credit report cleaning services. View
their offer.
If your credit
is damaged? ClearCredit can help you get your credit report
history back on track. 
If you know you have good credit, continue
learning about buying a home below.
>Next>
Learn How to Increase Your
Borrowing Power
|
