Buying a first home is a huge step in life. Not only is it the biggest financial commitment most people ever make, but it’s a commitment to a whole style of living. When you purchase a house, you’re putting down roots in a community. You’re identifying with a location and establishing a home base.
Based on your new home’s location, you’ll determine your professional commute, grocery store, access to recreation, schools, and social activities. It’s a lot to think about! Whether you’re on a busy street, in a quiet neighborhood, or an acre away from the closest neighbor, you’re making lifestyle choices with your home purchase. It’s important to make sure that lifestyle is going to be affordable once you’re in the house. Many prospective homebuyers think about where they want to live in terms of school districts and neighborhoods, but what each buyer can actually afford in their dream location is often another story.
How Do Lenders Calculate Home Affordability?
When a lender reviews your financial picture to determine how much of a home loan you can afford, they are calculating your debt-to-income ratio. They look at how much money you make and how much of that can reasonably be spent on a home. The lender isn’t only thinking about the listing price of the home. They consider your total monthly cost for the loan’s principal, interest, taxes, various types of insurance, and HOA or similar fees. The lender will assume you can spend about 36% of your monthly gross income on those costs and will issue your pre-qualified, or preferably pre-approved, loan amount.
This basic calculation is just that: basic. It doesn’t factor in all the other details that will go into determining if you can actually get approved for a loan.
How Do Lenders Decide if I Qualify for a Home Loan?
When you are ready to get serious about buying a home, it’s time to get pre-approved. Where pre-qualification is a quick calculation, pre-approval involves many more steps. The mortgage broker doesn’t just want to know if you can technically afford a home. Now they want to know if you will actually be a good loan candidate.
To determine if you qualify for a mortgage, the lender will look at more of your financial data, including:
- Credit score – a score of 700 or better improves your chances of getting a loan. If you have some issues with credit, we can help you improve your score before the lenders look at it.
- Employment history – gaps in employment can be a red flag for lenders. They want to know that you’re capable of reliably making monthly payments, so they’d like to see at least 2 years of solid employment history. If you do have a gap in employment, we can review the circumstances to give you an idea of whether or not the lender will consider those factors.
- Big changes in income – if you took a large pay cut, or you had a large jump in income, the lender is going to ask questions. Once again, if you have a reasonable explanation, we’ll help you provide a statement that allows the lender to make a more informed decision.
- Missing income – if you lost your job and collected unemployment compensation for a period of time, that’s not income in the eyes of mortgage lenders. Get back to verifiable income as quickly as possible so that you have a reliable financial history to show the lenders.
Look Within Your Affordability Range
Once you know how much house you can afford, stick to your budget. If you have a real estate agent who consistently shows you houses outside of your mortgage approval amount, they aren’t working in your best interest. At 1SlickHome.com and The Geoff Slick Team at Keller Williams, we understand your wants versus your practical affordability. We don’t want you to get the house of your dreams, only to find yourself unable to put food in its fridge each month. We will help you patiently watch the listings for homes you can really afford and live in comfortably.
We’ll also help you be realistic about your future home. You may wind up outside your favorite neighborhood but within your desired school district. You might choose to purchase the house with the mint green bathtub, wallpaper in every room, and unfinished basement because the house itself is in great shape, and you’ll be able to make improvements over time as you build equity.
If you’re worried that you may be going after more house than you can afford, contact us to get started on a practical plan to home ownership that doesn’t make your new house the poor house. 1SlickHome.com and The Geoff Slick Team at Keller Williams works with buyers and sellers all over Montgomery and Bucks Counties, including Lansdale, North Wales, Doylestown, Quakertown, Harleysville, Souderton, Perkasie, Chalfont, Collegeville, and more.