Now that you know you want to buy a house, how do you know how much you can afford and if you can qualify for a loan? The way to get started is to contact a reputable, local lender.
Pre-Qualification versus Pre-Approval
Pre-Qualification is a basically a “guess-timate” of what you can afford based on what you tell your loan officer about your income, debt and credit history. At this stage, this information is not verified, so it really is just an educated guess. A Pre-Qualification letter gives you no credibility with sellers that you are a financially solid buyer. The only benefit of getting pre-qualified it to get a general idea of how much you can afford.
When you are ready to look for a home, you’ll need to get Pre-Approved. This involves providing your lender with your financial documents such as tax returns, bank statements, pay stubs, etc. Your credit will be pulled and analyzed; and the other information you provided will be verified.
A Pre-Approval letter carries much more weight, and shows a seller that you have the financial backing to purchase their home. Wait to go out and tour homes until you are Pre-Approved.
What Factors Affect What I Can Afford?
There are three factors that affect how much you can afford when you decide you would like to buy a home.
- The down payment – do you have enough liquid cash to make a down payment?
- Your ability to qualify for a loan.
- The associated closing costs on your home.
How Much is My Down Payment?
Depending on the type of loan (VA, FHA, Conventional), buyers can expect to pay 0% to 20% or more of the purchase price up front.
How Much are Closing Costs?
You will be required to pay fees for acquiring the loan and other closing costs. These fees must be paid in full at the closing unless you are able to include them in your financing. Typically, closing costs will range between 2%-3% of your mortgage loan amount.
What Does my Monthly Mortgage Payment Include?
Your mortgage payment to the lender includes the following:
- The principal on the loan (P)
- The interest on the loan (I)
- Property taxes (T)
- The homeowner’s insurance (I)
This is what we call PITI. If you have a fixed-rate loan, your principal and interest will not change, but what will change will be your property taxes and your home insurance. Every year, your monthly mortgage amount could go up or down depending on if your taxes and insurance goes up or down.
What Up Front Costs Should I Be Prepared For?
When buying home, your lender may charge you to pull your credit report and the appraisal fee. This can be about $500 to $600.
When you find the home and write up an offer, be prepared to write an earnest money check. This amount is negotiable but plan on the earnest money to be about 1% of the purchase price. This money is collected from you and held until the transaction closes.
Once you and the seller agree on terms and you are under contract, the next fee would be your home inspection. Buyers in our market are responsible for paying for their own inspection fees. This can range from $300 to $600. Inspections are not required by the lender but are always recommended.
See more articles in my Home Buying Guide:
Must-Have Online Research Tools Every Buyer Needs
The 8 Most Important People You Need to Know in Real Estate
10 Critical Questions to ask your Realtor
6 Tips when Purchasing a Home
Top 10 Reasons to Buy a Home
10 Commandments when Applying for your Loan
How Buyers Can Negotiate Successfully in a Seller’s Market