The coronavirus pandemic has prompted many individuals to think more specifically about homeownership. This is most likely for two reasons: the fact that so many people are spending time cloistered in their apartments while they work from home and the historically low-interest rates on mortgages. The combination of these two factors has made more people want to figure out a path to homeownership, but what exactly does buying a house entail?
One of the most important things to determine when you’re starting to think about purchasing a home more seriously is how much home you can actually afford. After all, in order to purchase a home, you need to be able to qualify for a home loan. Lenders will evaluate your mortgage worthiness, as well as how much of a loan they’re comfortable lending you, based on a variety of factors. Here are a few questions to keep in mind as you do your research to determine how much home you can afford.
What’s your credit score?
Your credit score is one of the first things lenders will take a look at before approving you for a mortgage. Different lenders have different requirements when it comes to what sort of mortgage they’re willing to approve. Generally speaking, you’ll want a credit score of at least 700 if you want to qualify for a better interest rate and a larger mortgage. That being said, different homebuyers assistance programs may enable you to get a mortgage with a credit score of at least 650, which is why it’s useful to do your research and compare different lenders.
What’s your debt-to-income ratio?
Another major factor for determining how much your mortgage’s loan amount will be is something called your debt-to-income ratio, also known as your DTI. Put simply, this figure helps lenders see what sorts of other monthly payments you might have in addition to the amount you’ll owe on your mortgage. If you have too many other loans taking up your monthly payment, a lender won’t give you as much money towards your home price, which could limit the size of your new home or the location of it. Paying off more of your debts and increasing your salary are two ways to improve your DTI.
How much of a down payment do you have?
The typical rule of thumb is to save 20 percent of the home’s value in order to qualify for the best interest rates. While you may be able to get by with a 10 percent downpayment, it’s important to note that you’ll need to take out PMI (also known as Private Mortgage Insurance) in order to insure your loan in case you were to miss your monthly mortgage payment. PMI is generally a small fee so it could be worth it to put down less of a down payment, but it ultimately depends on your market.
Another way to increase your down payment is to sell your existing property. Rolling your current home’s equity into a home purchase makes it a much more attractive real estate transaction, so if you’re not a first-time homebuyer definitely consider this approach. Selling your home yourself is one way to maximize your home’s sale price even more, since it won’t rely on someone who’s a member of the National Association of Realtors taking a cut of the proceeds.
If all of these factors seem like a lot to keep track of, it might be worth using a mortgage calculator to learn more about what factors are impacting your home search. For example, a mortgage calculator can help you see how much your monthly mortgage payment will be, which is an important thing to know before you make a big purchase. You can also learn more about how other factors such as your Loan to Value Ratio can affect homeownership. Purchasing a house is a big financial decision, so it’s important to get as much information as possible before you buy property.