Calculate How Much You Can Afford
While you may not be able to know your exact mortgage amount until after you have filled out a mortgage application and gone through the approval process with a lender, you can get a preview of what to expect.
Use our quick calculator to estimate how much you could be able to borrow, earnings necessary to purchase the home you want, or what your monthly payments might be.
Income Level Needed For Specific Mortgage Payment
Many factors go into determining how much money a bank would loan you to purchase a home. Of course, your annual income is one of the most important factors. Find out how much you need to earn to purchase the home of your dreams.
How much should you borrow? One common rule of thumb is the 28/36 rule, which states that the percentage of your annual gross (before tax) income that you spend on your monthly mortgage payment, including Principal, Interest, Taxes and Insurance (PITI), should not exceed 28 percent.
Additionally, according to the rule, the amount of total debt payments for your household, shouldn’t exceed 36 percent of gross income. That would include credit cards, student loans and automobile payments.
Home Prices & the Resulting Mortgage Payments
How much will your payment be, once you factor in principle, interest, insurance, property taxes, and other expenses? Remember to factor those costs into your budget, as you determine which homes are within your price range. And don’t forget to account for maintenance and repairs.
Down Payment Myths VS Reality
Some of the biggest myths about the home financing process are related to down payments. Here are a few misconceptions about down payments and the reality behind them:
You need a 20 percent down payment to buy a home.
In reality, this is simply untrue. Multiple mortgage programs require no money down, or just a small percentage.
Low down payment options are only for first-time home buyers.
Low and zero down payment loan options are available to many qualified customers, including repeat home buyers. Discuss the features of each program with your mortgage consultant.
Gift funds are not allowed to be used toward a down payment.
Gift funds are, in fact, allowed for many of our mortgage programs when buying a primary residence. Gift funds are allowed for low down payment conventional and FHA programs, as well as no down payment programs such as VA and USDA home loans.
Qualifying for a down payment assistance (DAP) program is difficult.
A variety of DAP programs are available with various features and qualifying criteria such as income, credit, and property location. A mortgage consultant can explain the DAP programs available in your area, discuss your eligibility, and walk you through the entire process.
Review Alternate Down Payment Sources
You can never have too much in savings, but many renters over-estimate the amount of cash needed to become homeowners.
According to one study, 39 percent of renters have saved money for a down payment for a home*. Of those who buy a home, the sources of a down payment are:
27% Gift from Relative or Friend
9% Sale of Stocks or Bonds
8% 401K / Pension Fund
7% Loan from Relative or Friend
Some loans require as little as 3 percent down, and a knowledgeable mortgage consultant can help you look at all the options. Alternate funding sources for down payments can include gifts from relatives or money saved for retirement. Be sure to understand the laws governing each. Depending on the market, you might secure closing-cost assistance from the seller, as well.
*Source: National Association of Realtors, Profile of Home Buyers & Sellers
Understand the Difference Between Pre-Qualify and Pre-Approval
The first step in getting a mortgage often includes either getting pre-qualified for a mortgage or pre-approved. The First Home program starts with pre-approval although below highlights the difference.
The mortgage lender will ask you a few questions about your overall financial picture, including your debt, income and assets.
After evaluating the information, the lender will provide an estimated mortgage amount based on the unverified information provided.
This will give you an idea of how much home you can afford as you start your hunt. It’s important to realize that since this is based on unverified information and does not include a credit report, it does not carry the same weight as a mortgage preliminary approval.
For this approach, you’ll complete a preliminary mortgage application and provide the lender with all of the necessary documentation to evaluate your current financial picture.
The lender will also check your credit history. A preliminary approval estimates how much you may be able to borrow based on your verified income, assets and credit reports.
Having a preliminary approval letter makes you more competitive against other bidders and increases the chance that the lender who offered the preliminary approval will provide your financing.
Review Mortgage Basics
If you’re planning to purchase a home, it is important to understand each of the components that make up a mortgage payment, which can help you determine a monthly payment with which you are comfortable.
The principal part of your monthly payment pays off the loan amount you initially borrowed to buy your home.
In return for providing the funds you need to buy a home, lenders charge monthly interest on the principal balance you owe.
Property taxes may be collected by your lender on a monthly basis and held in an escrow account to be paid on your behalf as they come due. The good news is property taxes are usually fully deductible at income tax time. Consult a tax advisor for details.
Homeowners insurance provides financial protection in the event of losses that are the result of fire, wind, natural disasters or other hazards. Most mortgage lenders require you to have a homeowner’s insurance policy and may also collect these funds to hold in an escrow account to pay your insurance company.
Mortgage insurance protects the lender against financial loss if a customer fails to repay the loan. FHA-insured loans require a mortgage insurance premium (MIP); VA loans may require a funding fee; Conventional loans can be insured with private mortgage insurance (PMI). If mortgage insurance is applicable to your loan, that part of your payment is forwarded to the agency providing the insurance.