Houston, TX, Oct. 04, 2022 (GLOBE NEWSWIRE) -- Blink Lending & Investments is a full-service local independent mortgage company partnering with its Clients throughout their home buying and real estate investing careers.
Buying a home is a huge financial decision and one that should be taken very seriously. Before you start looking at listings online or in person, you need to figure out how much home you can afford because the last thing you want is to fall in love with a home that costs more than you’re comfortable spending.
So, how do you determine how much you can afford when it comes to buying a home? It’s easier than you may think. Let’s look at some of the factors and equations lenders use when working on getting your mortgage loan approved.
Know Your Income
Lenders base a large part of the preapproval process on your income – it will probably be the first thing they ask you! You’ll want to find out how much you make each month before taxes are taken out. This includes any source of money you bring in as long as it is documented.
Usually, pay stubs and tax returns will be looked at, and if you work a freelance job or a side hustle, you’ll need 2 plus years of experience for that income to count towards your loan qualifications. If you have less than 2 years of work experience or if that income can’t be verified, it may not be included in the amount of money you’re approved for, which could mean you either have to have a larger down payment or buy a less expensive house.
Is My Income The Only Factor When It Comes To Loan Approval?
Lenders look at more than just your income when they work toward getting your loan approved. They will look at what is called your debt-to-income ratio (DTI) to give them a better understanding of your financial situation.
There are two types of debt-to-income ratios: front-end ratio and back-end ratio. With the front-end ratio, your lender will look at how much of your monthly income would go toward housing expenses like your mortgage payment, homeowners’ insurance, HOA fees, and property taxes. The back-end ratio looks at how much of your monthly income would go to your housing expenses and other debt. Your car loan, student loans, and credit card payments are factored into this number, giving the lenders a good idea of how much you can afford. A lot of lenders want to see a DTI under 43%, but must allow for up to 50%. If your DTI is higher than that, you’ll need to pay down credit cards or other debt you may have before you can be approved for a loan. If that’s not possible, you’ll either need a larger down payment or to find a less expensive house with a lower monthly mortgage payment.
What Role Does My Credit Score Play?
Your credit score is an important number that plays a massive role in the mortgage rate and type of loan you’re able to get. Basically, the higher your credit score, the lower your interest rate and loan terms. Lenders like to see a score in the 700s, but if your score is not that high, it’s okay.
If you have a lower score, say somewhere in the 650 range, you will most likely still qualify for a mortgage, but you’ll have a higher interest rate since you are seen as a “riskier” borrower. That higher interest rate translates into a higher monthly mortgage payment, so it’s a good idea to get your credit score up as much as possible before you buy a home – it’s a decision that could save you tens of thousands of dollars over the life of your loan.
Let’s Crunch Some Numbers
Ready to figure out how much you can afford? Here is a simple equation to get you started: First, find your total monthly household income. This should be the amount you make before taxes and must be able to be documented. Now, take that number and multiply it by .50.
Next, add up your minimum monthly debt payments like your credit card payments, car loans, and so forth. Do not include expenses like insurance or utilities in this number. Now subtract your debt payments from the number you found in step one. This number is the maximum monthly mortgage payment you can qualify for. To see what that translates into as far as home value is concerned, divide it by .008.
Monthly Household Income: $8,000 x.50 = $4,000
Debt Obligations: $ 750
Maximum Monthly Mortgage Payment: $4,000 - $750 = $3,250
Home Value: $3,250 / .008 = $406,250
Using this equation can help you get an idea of how much you can afford so you can start looking at homes available in the price range you can afford. Another good rule of thumb is that if your monthly household income is more than 2.5% of the home’s purchase price, you should be able to qualify for the home without any issues.
Ready To Buy A Home?
Have an idea of how much you want to spend? Great! The next step is to contact Blink Lending & Investments to get the loan approved. We will guide you through the process and find the best loan for you and your financial situation.
615 Heights Blvd
Houston, TX 77007