You want to own a house, town house or condominium. Let us help you. There are many properties with payments similar to rent costs. For a lot of people, the question is, “How much money do I need and what will my monthly payments be?”
You can easily find out about how much house you can afford by using our calculator, How Much House Can I Buy. If you are seriously shopping for a home, however, you should call us to get a firm idea of the best type of home loan for you as well as our free pre-approval letter.
What Goes into Determining If I Can Afford a House?
- Income
- Credit Score
- Monthly Expenses
- Cash on Hand
Your Income
Everyone knows your income counts! What we’ll consider when deciding what you can borrow (and your co-borrower if purchasing jointly) are three things all lenders review.
- Your monthly payments (including credit cards, car loans, student loans), and
- Your income, including your work history.
- Your total house payment which will include Principal, Interest, Property Taxes, Homeowner’s Insurance (PITI), and Monthly Mortgage Insurance (PMI)
You will need to show your work history covering the last two years by sharing W-2s, 1099s if you are a contract worker, or tax returns. A strong borrower will have been on the same job or in the same field or line of work for at least the past two years. If you have recently graduated from college and started a new job, do not worry. Being in college counts towards your two-year work history.
If you are self-employed, it is important that you have been self-employed for the past two years. Or you may still be able to get a mortgage if you have been in the same line of work for the past two years and filed at least one tax return as a self-employed individual. Send your personal and or corporate tax returns to a lender, so they can calculate your income to see how much house you can afford.
Monthly Payment Percentages
You will be hearing a lot of new mortgage lingo when you buy your home, like debt to income (DTI) ratio, so lets take a quick look.
- Your “front DTI” figures your house payment as a percentage of your gross monthly income. For example, if your house payment is $1,000 and your gross monthly income is $4,000, your front ratio is 25 percent. The rule-of-thumb is to have a ratio here that is 20 to 35 percent.
- If you have other monthly payments like auto, credit card, and student loans, lenders will calculate your total DTI by taking your house payment plus the other monthly payments as a percentage of your gross monthly income. For example, if your house payment is $1,000 and your auto payment is $500, you have total monthly payments of $1,500. This is 37 percent of a gross monthly income of $4,000. The rule-of-thumb here is to have total monthly payments that are 35 to 45 percent of your monthly income.
Hint: If you believe your ratios are higher than this please contact us to discuss your situation, as we may be able to help you still. Our How Much House Can I Buy calculator is a good tool for you to try, too.
Your Credit Score
Maintaining your credit score is critical. Most buyers have a ballpark idea of their credit score. It is a number value that describes how well you have paid your bills, including your credit cards, home, auto, and other loans. Folks with the highest credit scores get the best loan rates.
Your credit score ranges from a low of 300 to a high of 850. To learn which online source we recommend to get a free credit score, go to How Your Credit Score Affects Your Mortgage.
If you want a home loan, you’ll need a tri-merge score or a residential mortgage credit report (RMCR). A tri-merge score includes the scores from the three largest credit-scoring agencies, Equifax, Experian and Transunion, in an easy-to-read format. The RMCR combines two scores and adds additional information on your borrowing habits to help a lender decide whether you a good financial manager. Both types are a stricter, tighter measure of your ability to repay a mortgage. If you ask for a free pre-approval letter, we will provide you with this credit score report at no charge.
Your Credit Karma score and the tri-merge or RMCR score that lenders access are not the same, and usually the report that we use will show a lower score. The lower score does not matter much if you have a score of 780 score, but if Credit Karma says your score is 625 and our report shows 575 that is the difference between qualifying and not qualifying for a mortgage!
Your Monthly Expenses
While your credit score and income are critical to getting a home loan, your expenses are a limiting factor that you must absolutely take into account when you’re trying to afford a house. Lenders will review existing auto loans, credit card debt, and student loans. These loans are a good credit score indicator for banks if you’ve paid them in a timely fashion. Late payments, on the other hand, will lower your credit score.
Budget monthly living expenses, including food and fuel, and payments in order to see how a new monthly mortgage payment will fit in with your current monthly expenses. Owning a home can bring unexpected expenses, like a roof or heater that needs replacing, so make sure you can cover those expenses as well as your mortgage payment. Be sure to examine your expenses and income to determine not only how much house you can buy, but how much house you feel comfortable covering.
Cash On Hand
Affording a house means having some cash on hand. Unless you are buying new construction, a seller will ask for “due diligence” and “earnest money” along with your offer to purchase. You will also need to pay about $500 for a home inspection and $525 for an appraisal. There are some programs available through government-insured loans like USDA and FHA that require no money down or 3 percent down, but typically loans, known as “conventional loans,” require 3 or more percent down.
For more information on due diligence and earnest money, see Steps to Getting a Mortgage.
Hint: Please try our What’s My Payment calculator to see how the amount of money you put down and the type of mortgage (Conventional, VA, FHA, USDA) you choose will effect how much you can afford.
PITI
PITI—more mortgage lingo—means principle, interest, taxes, and insurance. As mentioned earlier, your total house payment will include Principal, Interest, Property Taxes, Homeowner’s Insurance (PITI), and Monthly Mortgage Insurance (PMI). Not all loans require mortgage insurance.
The interest is essentially a charge for borrowing money. Interest is calculated as a percentage of the amount owed. This means that while you agree to borrow a certain amount, or principal, you’re actually paying back the principal plus interest.
In North Carolina, property taxes are set by each city and county and based on the assessed value of your home. The tax is added to your monthly payment. The tax rates are available online at city and county government sites.
The lender will require you to carry homeowner’s insurance. You pick the insurance policy and the payment is added to your monthly payment. If your down payment is less than 20 percent of the purchase price, the lender will ask you to also carry mortgage insurance. This protects the lender if you default on the loan.
Still Have Questions?
Banks and lenders have different rules that affect how much they’ll lend you. If your finances are simple, start with our How Much House Can I Afford? to get a quick price range. For more information, or to discuss your options, email us at info@carolinahomemortgage.com or call. We are available after hours and on weekends, too.
Don’t hesitate to call far ahead of your purchase. We can help you set your financing goals. And since we are an independent mortgage broker, we represent many lenders which means you can compare rates and determine the best loan to meet your needs
You have the Carolina Home Mortgage pledge that we’ll answer your questions simply and honestly. Our pledge includes a no-pester promise where we’ll wait for you to call us back if you want to work with us. In fact, if we’re not your best option, we’ll tell you who might be. Integrity counts when you work in a community for 20 years.
