Enjoying a leisurely dinner with friends. Hearing laughter as the neighborhood children play on a swingset out back. Snowy evenings curled up with a cup of hot chocolate. Whatever you imagine for your home, you want it to be a sanctuary for you and your family. But before you can relish in the comfort of your house, you have to find it first.
If you’re like many Americans, buying a home will be one of the biggest financial commitments you make. Finding the perfect, and perfectly affordable, home is a lot more than an asking price.
There are other costs to consider that may include closing costs, home inspections, appraisals, realtor commissions, homeowners insurance, property taxes, HOA fees, new furniture—the list seems never-ending. But before you dive into the nitty-gritty, one big question is, how much should you spend on a house?
Determining How Much to Spend on a House
There are a wide variety of loan programs available each with their own set of qualifying criteria. It is standard for most loan programs to use a borrower’s gross wage income before taxes for qualifying purposes.
The debt that is used is normally taken directly off the credit report which would not evidence all your monthly obligations such as auto insurance, utilities, etc.
What loan amount a person may qualify for under the lender calculation vs what a person is comfortable with paying can sometimes differ. It is generally recommended to do some calculating on your own using your net take home pay and estimating all of your ongoing expenses.
In addition, you may also want to get pre-approved for a mortgage which will not obligate you to any one lender, but may give you a good idea on what the maximum loan amount is that you may qualify for and the monthly estimated payment.
Compare this with what you thought you could afford using your net income calculation and remember the lender will qualify you for the maximum loan amount they are able to lend based on the program you applied for.
You choose which loan amount may work for your budget. Keep in mind that different loan programs offer different qualifying criteria, for instance on jumbo loans you may see lenders limit their qualifying ratio to 43% debt to income (DTI) or less.
For conforming loans you may see lenders offer a qualifying ratio of up to 50% DTI. Doing your research on what different loan programs offer while shopping around for rate is recommended.
If the variety of guidelines feels overwhelming, it could possibly help to take a look at a mortgage calculator.
Using this tool could allow you to play around with a few “what if” scenarios (like, what if we make a plan to save a little bit longer?) and see how much different types of mortgages could cost.
More than Just a Down Payment
When calculating the cost of home affordability, these two aspects usually come into play—how much mortgage you can afford, and how much cash you can bring to the table for closing.
Your monthly mortgage payment will include principal and interest, but that’s not the total bill. It’s also likely to include property taxes, homeowner’s insurance, and possibly private mortgage insurance (PMI). So, while the mortgage itself might be $1,625, the full amount due each month could be a bit more.
In addition, if you purchase a home with homeowner association (HOA) dues, or a home that requires additional insurance such as flood, these would be additional items that can increase the monthly mortgage payment. HOA dues are not included in your mortgage payment, but can be due to the association on a monthly basis.
One way to lower those payments is to put more money down up front. And, if you can afford a full 20% down payment, you could also get out of paying PMI. PMI is an insurance required on certain loan programs to protect the lender against default.
Some Jumbo loan programs may not have a PMI requirement even with less than 20% down. These higher loan amounts can call for 10% down with no PMI requirement, but that means shelling out cash for a larger loan. Closing day can be an expensive one.
In addition to any down payment, both buyer and seller are responsible for some portion of closing costs. For buyers, it’s typically between 2 and 5% of the cost of the home.
If you’ve already spent all your liquid cash on your down payment, it is possible to pay for closing costs through a lender credit. Lender credits may come in the form of rebate by taking a slightly higher interest rate. This would mean you pay more in interest over the life of the loan in exchange for the lender rebate to cover upfront costs.
Closing costs can also be a point of negotiation between buyer and seller, so buyers who are strapped for cash could potentially work with the sellers on a compromise.
Setting Your Expectations
So, you’ve run the calculators, done your own math and come up with what you can reasonably afford. Let the house-hunt begin…by setting some guidelines.
Before you dive into those better-than-life pictures of homes with brand-new everything in idyllic, park-like settings, consider getting yourself into the right frame of mind with these questions:
• What’s your homeownership goal? Are you looking for a starter home that you’ll sell or rent in a few years after you start a family, or are you on the hunt for your forever home?
• Are you confident in your job stability and monthly income? Do you think you’ll be making more money in the years to come, the same, or less?
• Is your desired location one that’s likely to help you build equity?
• Are you willing to pay for extras like yard maintenance, pool care or a housekeeper for larger properties?
• How much will it cost to heat or cool the home? Is the heat electric or propane? Are you okay with city utility bills, or would you prefer septic and well?
• What are your must-haves, your deal-breakers, and your nice-to-haves? What are you willing to compromise on, especially if your other half has different expectations?
These questions may provide guidelines to help you determine what factors are most important for you and your family. Being able to prioritize your wants and needs could be helpful as you navigate the local real estate market and start making decisions about which houses are viable options for you and your family.
Tips for Staying the Course
After you have determined how much you are comfortable spending on a house, it could be worth getting preapproved for a mortgage before you begin looking at houses.
Being pre-approved for a mortgage is considered a good indicator to sellers that you are serious about buying a home.
Doing your research upfront such as reviewing your credit score and becoming familiar with the different loan programs offered for your debt-to-income ratio qualifying range is generally considered to be a good idea, as these are typically factors that lenders review when determining mortgage terms.
Getting preapproved for a mortgage is a more in-depth process than prequalification, but is not as involved as actually borrowing a mortgage all at once.
The preapproval process typically involves filling out an application, consenting to a credit check and providing information on your income and assets.
The lenders underwriter then reviews this information and provides a preapproval letter stating that you are preapproved subject to certain conditions such as finding an eligible property.
The preapproval letter will document the type of mortgage, estimated loan amount and terms the applicant has been preapproved to borrow.
In competitive housing markets where sellers may be fielding multiple offers, having pre approval letter attached to your bid can make for a stronger offer because the seller has much less concern the deal may fall through escrow because the borrower doesn’t have sufficient credit, income or assets for the loan.
The mortgage won’t be finalized until the property appraisal, title report and any subject to conditions are received by the lender. At this point, a loan underwriter would review the remaining details against the loan guidelines and issue final approval also known as a loan commitment letter, which means the mortgage has been fully approved.
SoFi Makes the Process Less Painful
Buying a home can be as stressful as it is exciting. At SoFi, we have dedicated mortgage loan officers that can help with some of the frustrating details so you can focus on the more exciting aspects of buying a home.
You can get prequalified in two minutes and view competitive mortgage loan rate options and member discounts, no hidden fees, and as little as 10% down.
In addition, you’ll have access to financial planners and a community of other homebuyers just like you who can help every step of the way.
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