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There are millions of homes to choose from and it can be daunting if you start house hunting without narrowing your search first. To set yourself up for success, the best place to start is to consider how much home you can afford.
Many banks will require that your monthly costs can't exceed a percentage of your income (for example 28%). That means if you earn $50,000 per year, your total monthly housing costs should not exceed $1166 (28% of your monthly income). But it's more than just your income that the bank will look at...
In addition to your income, if you have recurring debts, the total monthly payments on existing debt plus new payments for your mortgage may not be allowed to exceed a certain threshold (for example 41%). Using the example above that would mean that if your monthly debt payments are in excess of $541 per month (bringing your total debt of $541 + $1166 = $1708 or 41% in total).
You can use a mortgage calculator or to put it simply, someone that makes $50,000 before taxes should probably target a home that is $250,000 or no more than 5 times their annual salary.
Most lenders prefer a down payment of 20% or higher to qualify for a conventional loan, but if you don’t have 20% there are still loan options you might consider where you can put down less!
For many would-be buyers, the down payment is a big factor that influences how much they can afford so we have written an entire section about down payments.
Nearly all mortgage loans and lenders require some amount of cash as a down payment. The amount you've set aside for this could determine the kind of mortgage you qualify for. It will also impact how much you can afford to borrow for a home.
If you're searching for "how to buy a house" you might have already put away some savings - if that is you, congratulations and onward to step 3.
If you’re still saving, read on.
Most lenders prefer a down payment of 20% or higher to qualify for a conventional loan, but there are more than 2,400 home buyer assistance programs in the United States that offer down payment help in the form of grants, low-interest or deferred loans, forgivable loans, and other programs. Help with closing costs may also available.
However, you should be aware that with a smaller down payment, you’ll likely be required to pay for mortgage insurance, and your loan application will be subject to greater scrutiny.
Here are several loan types that allow a smaller down payment amount:
VA: Eligible veterans and their spouses can qualify for Veterans Administration loans. See if you qualify for a VA Loan with $0 Down and no mortgage insurance from our partner Veterans United.
One of the number 1 mistakes made by home buyers is NOT shopping around for a mortgage! Your Realtor knows a guy, or maybe your parents used a mortgage broker in the past.
Don't fall into this trap. It can take some time, but you're going to have your mortgage for the next 30 years, so it's really worth prioritizing.
Also, don't assume you can shop one mortgage lender today and another one next week. There is market volatility in the mortgage market so you really need to sit down and get ready to contact a few banks. If you do it now, odds are good you can lock in your rate for a while.
To expedite this process, LendingTree allows multiple banks to compete for your business.
Once you set aside some time to make a few inquiries, tell the truth. Mortgage quotes can vary based on your down payment, credit history, income, assets, and debt.
Fill out the form with honest information to get a reliable quote. They're going to verify this information anyway so putting in misinformation won't help you at all in the long term.
Qualifying for a mortgage loan in order to buy a home can often be a stressful and strenuous process. In the end, the pride, security, comfort, and freedom that comes from owning your own home makes all the effort worthwhile.