3 Questions to Ask Yourself Before Applying for a Home Loan
Buying a house is the largest financial expense many of us will ever make. It’s a decision to approach with honesty and sincerity, so you don’t get in over your head. There’s “purchase power” versus “purchase comfort zone,” says Eric Broermann, a real estate agent with McWilliams Ballard, Inc. in Alexandria, VA. “You should be comfortable with the loan amount and not feel it’s a burden that prevents you from paying for other things.”
According to a recent article in DailyWorth, buying a home that’s too expensive can leave you strapped and unable to prepare for other financial goals, like paying off your student debt or taking vacations. “Determining how much you can spend is the first step to responsible home buying,” says the article, which offers these three to help you determine your own purchase comfort zone.
- How much have you saved for a down payment? Most mortgage lenders will require a down payment ranging from 3 to 20 percent of the home’s purchase price. If you’re a first-time homebuyer, taking time to aggressively save a down payment will pay off — a larger down payment will let you buy more house or make smaller monthly payments, advises DailyWorth.
- How much will your mortgage cost each month? Lenders will calculate your debt-to-income ratio to determine how much home you can afford. If you are already using 40 percent or more of your gross income to pay car payments and credit cards, that leaves less than 60 percent for other your household spending (like your phone bill, utilities, and transportation) and house payment. Most lenders recommend that you spend no more than 28 percent of your monthly income on a mortgage payment, says the DailyWorth article.
- Is your credit score in good shape? In addition to having a good credit history, your credit score will determine whether you qualify for a mortgage and what terms you’ll be offered. Having a FICO score of 700 versus 698, a difference of two points, could cost you thousands in interest charges each year, say the experts. So, if you’re on the border, you may want to boost your score a bit. “Sometimes the fix can be quite simple,” says Kris Crecelius of All Real Estate Options in Orange Park, FL. For example, if a high balance on one credit card is keeping your credit score low, you should pay down that card and wait a month (for a rescore) to apply for a home loan, she suggests.
Once you’ve determined how much you can spend on a new home while still meeting other financial goals and obligations and avoiding the stress of excessive debt, you’re ready to start shopping, notes the article. “Just remember to stay within your budget: Avoid the temptation to look at houses that cost more than you’ve committed to spend and you’ll be more satisfied with your home — and your whole financial life — in the long run,” DailyWorth advises.