FAQs for First Time Buyers: How Much Can I Afford?
It is in fact a buyer’s market right now, so there are many people out there seeking answers to some of the initial questions that arise when considering the purchase of a home. This post will be the first in a series of answers to those FAQs that many first time buyers want to know.
In the grand scheme of things, there are three things lenders will consider when you apply for a loan:
*Your income.
*Your debt.
*How much cash you have for a down payment.
Most lenders require that your debt-to-income ratio does not exceed 36%. And generally speaking, the expenses for your home should not exceed 25-28% of your income. Just to be clear, your housing expenses not only include your monthly mortgage payment, but also interest on the loan, insurance and taxes.
Also, keep in mind that your income may go beyond the normal paychecks you receive from your employer. It may also include bonuses and commissions, social security and/or veteran’s benefits, child support and alimony, rental income, and income from trusts and partnerships.
Here are a couple of great sites to help you calculate how much you can afford:
http://www.ginniemae.gov/2_prequal/intro_questions.asp?Section=YPTH
http://cgi.money.cnn.com/tools/houseafford/houseafford.html
Your debt-to-income ratio will play a major factor in how much lenders are willing to let you borrow. They will consider any other loans you already have out (auto, tuition, real estate, etc), credit, and child support and alimony. These expenses, in combination with your housing costs, should not exceed 33-36% of your monthly income.
If you were thinking about buying a home with no money down, think again! Especially in this day and age, it is very likely that conventional lenders will not loan to those who have nothing to put down. And while there are some, such as VA certain programs, that offer 100% financing, it’s still highly recommended that you don’t go with this option. You’re better safe than sorry when buying a home, so save for that down payment before you buy! Typically you will need to be able to offer 20% of the total price of the home.
Here’s something to keep in mind when choosing a lender: the requirements for conventional loans versus FHA loans do differ. Stay tuned for more on this subject!
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