When the idea of buying a home becomes a real possibility, figuring out what you can actually afford (or what loan amount you can qualify for to borrow) can be a little tricky.
You may have a general idea in terms of what you want your mortgage loan amount and monthly payment to be, but that number may get a little hazy during late night sessions of online house shopping.
It’s easy to start gravitating toward those professionally lit photographs of expansive, renovated kitchens and manicured gardens. You might start to think: What’s another $100,000, right?
Or maybe you really do need an extra bedroom, additional garage space, or a pool with a swim-up bar. Why not?
You can see with these examples how a person’s initial home-buying budget can quickly balloon out of control. Fortunately, we created a home affordability calculator that might help give you a sense of a suitable home-buying budget.
Additionally, there are a few simple first-time home buyer guidelines that can help you figure out your budget based on your financial profile. Taking the time to consider these factors can help you understand the realities of your budget, as well as the potential costs associated with buying a house.
How Much Am I Eligible to Borrow for a New Home?
Unless you’re planning to buy a home with your significant other or spouse in cash, you’ll need to figure out how much you can qualify for. Basically, this means learning what prospective lenders are willing to lend you.
Mortgage lenders use a few simple guidelines to help estimate how large of a mortgage you can afford. Lender guidelines are generally not set in stone; however, they just might be worth having in the back of your mind to help inform your home-buying process.
How much home can you afford? Use our
Home Affordability Calculator to
get an estimate.
How Do I Figure Out What I Can Borrow?
Regardless of the estimates mortgage calculators give you, you will need to identify the loan program and chosen lender in order to review the qualifying criteria.
Different loan programs can have varying eligibility criteria and these can even vary from lender to lender for the same loan program.
When reviewing mortgage program eligibility, the lender will consider factors such as your credit score, income, and debts, assets including the down payment as well as the type and market value of the house you want to buy.
For a conventional mortgage, such as a Fannie Mae or Freddie Mac, lenders are typically looking for a debt-to-income ratio (DTI) no higher than 50% , which is the maximum allowable DTI under these programs with automated underwriting approval.
You can come up with this ratio by adding up all your monthly ongoing debt payments and dividing them by your gross (or pre-tax) W2 monthly income. When it comes to a credit score, however, although the Fannie Mae minimum FICO score is 620, the actual minimum score requirement may vary from lender to lender.
So how do you determine how large of a loan a lender might extend to you once you identify which loan program you would like to qualify for such as conventional, jumbo, FHA, etc.?
To get prequalified for a mortgage, you would need to enter details about your finances, such as your income, assets, and debt. In most cases, you don’t need to supply any backup documents at this stage—the lender gives you an initial figure based on your input.
If you qualify for a mortgage, the lender can give you a prequal letter conditionally confirming your ability to buy a home up to a certain price. Although that number isn’t final, it can be a good way to get a ballpark idea of what you can afford as you shop for homes.
Getting prequalified at several different lenders can give you a sense of your options as far as loan amounts, terms, and rates. Getting prequalified or preapproved at several lenders may result in multiple credit inquiries which may or may not affect your credit score.
Soft credit pulls usually performed at the prequalification stage normally do not affect your credit score, whereas a hard credit pull normally completed at the preapproval stage usually does result in a credit inquiry which may affect your score.
When you apply for a mortgage preapproval the information you entered at the prequalification stage is verified as true and correct. At this stage you’ll need to give the lender records that prove your employment history, income, assets, and liabilities that aren’t on the credit report.
The lender will likely do a hard credit pull at this stage to verify your qualifying credit score and check for any history of late payments or other negative financial events. A preapproval letter can give you a more accurate picture of what size loan amount you are eligible to borrow and provide a stronger foundation when bidding on a home.
Keep in mind that, even if you are preapproved, it’s unlikely that you’ll lock in an interest rate until your bid is accepted and you are actively in contract to close because some lenders require a property address in order to lock in an interest rate.
How Big Are Down Payments Typically?
Typically, homebuyers are encouraged to put down as much as they feel they can reasonably afford. The more you put down, the less you’ll be borrowing, which means you’ll have a lower monthly mortgage payment.
And because you’re borrowing less, you’re paying less interest over the course of loan amortization
Traditionally, the down payment for a home purchase was 20%. But with the increase in home prices, this is not always realistic.
In fact, first-time homebuyers put down an average of 5%, according to the National Association of Realtors ®. However, if you put down less than 20%, you may end up having to pay PMI, which typically costs between 0.3% and 1.5% of your loan amount annually.
Note that this type of insurance protects the lender, not you, in case you have trouble repaying the loan. There are exceptions: When you borrow with SoFi, you may be able to avoid PMI by putting as little as 10% down (on jumbo loans only).
Deciding what to put down depends a lot on your financial situation. Making a large down payment may be wise, but you may want to consider having enough savings left over to cover all home buying fees, like closing costs.
One potential cost to factor into a home-buying budget is the amount you may need to have in reserve—sometimes required by loan programs.
Although this may not be necessary for conforming primary residences, for secondary, Jumbo, and income properties, you may need to have liquid assets (as in easily accessible money) that will cover at least two months and sometimes more of your total mortgage payment.
Additionally, although this won’t factor into a borrower’s mortgage budget when buying a home, it may be helpful to consider future renovations they may want to make to their home, and factor in those potential costs—even if they won’t need the money immediately.
Making sure you have enough in your coffers to cover the wants and the unexpected—and maintain your current lifestyle—is crucial. Most experts recommend having an emergency fund worth at least three to six months of living expenses to avoid having to take on additional debt if unforeseen costs come up.
Sometimes this means waiting a little longer so you can save for a larger home, or maybe setting your sights on a more affordable home that you can enjoy stress-free.
You can check out our mortgage calculator to get a quick and easy look at different financing scenarios.
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Checking Your Rates: To check the rates and terms you may qualify for, SoFi conducts a soft credit pull that will not affect your credit score. A hard credit pull, which may impact your credit score, is required if you apply for a SoFi product after being pre-qualified.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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