How Much Home Can I Afford?
One of the first questions to ask when you start looking for a new home is, “How much can I afford?” Unfortunately, there are a number of conflicting sources that argue on a variety of points. In order to get a better idea of your affordability range, we recently sat down with Jake Francom from First Colony Mortgage, EDGEhomes’ preferred lender, to discuss what to look for when buying a new home. Let’s look at a few of Jake’s home affordability guidelines and what every homebuyer should do before looking for a new home.
Understanding the Loan Process
When it comes to home loans, lenders are basically looking at one thing—debt to income ratio. The general rule of thumb is that your monthly mortgage payment should be between 28-36% of your monthly income (depending on your credit score).
In order to find your general affordability range, we take into account a few things. These include household income, assets, credit score, and your debt and expenses portfolio. Let’s look at each of these factors and the role they play.
Lenders look at your household’s adjusted gross income and is based on personal taxes only. If you have rental properties you can add in depreciation, but this only makes a difference if you have multiple rental properties. If you’re self-employed, lenders take the last two years of your adjusted gross income and average the numbers. Typically, the higher your income the more likely you’ll be given a higher amount due to the likelihood of repaying the loan.
Normally, you’re expected to use your income to repay any loans. However, some lenders may view you as less risky if you have any liquid assets. Liquid assets are assets that can be converted into cash quickly. These include savings, money market accounts, stocks, and government bonds.
- Credit Score
A credit score is a three-digit number calculated from your credit reports. This is a number based on the likelihood you will repay borrowed money. Your credit score takes into account: delinquent accounts, unpaid collections, past bankruptcies or foreclosures, tax liens or civil judgments, recent applications for credit, and outstanding debts.
- Debt and Expenses
Along with your credit score, lenders will look at any outstanding debts and your monthly expenses. These include monthly payments, car payments, other loans, and more. By combining your entire financial history, lenders are better able to assess what debt you can take on and give you a loan accordingly.
No matter what loan amount you qualify for, it’s important to be comfortable with your monthly mortgage payments. While your income and credit score may afford you a higher amount, the most important thing is finding what you’re most comfortable with. Working with our loan officers, decide which monthly payment works for you, how much you want to save, and how much you wish to allocate towards your home. Make sure that you find what works for you.
No matter what you do, make sure that qualifying for the loan happens first. Don’t start your home-buying journey by falling in love with a home only to find out that you can’t afford it. Start the process by finding what works for you. Set a budget. Know your budget. And don’t go over your budget. By prequalifying first, you know where to start and won’t get in over your head with excessive monthly payments. Fill out an application on our site to get a better idea about your options from a First Colony Mortgage loan officer.
EDGEhomes and First Colony Mortgage
First Colony Mortgage is EDGEhomes preferred lender. When building a new home, the mortgage can be different than existing houses. First Colony Mortgage is ready to assist and guide you through financing your EDGEhome. As part of the pre-qualification process, we verify things like; employment, income, and assets to make sure you qualify before you go under contract. That way you won’t have any surprises when your home is ready.