How expensive a home can you purchase?
An often quoted rule of thumb says you can afford to buy a home that cost up to two and a half times your annual gross income (before taxes).
If you are planning to buy a home with another person (spouse, parent, adult, child, sibling), you can add their annual gross income to yours to determine the price when buying a home.
Keep in mind that your buying partners credit history will also be taken into consideration, and they will also be responsible for repayment of the mortgage loan.
In the end buying a home comes down to two things:
How much you have available for the down payment.
How much a financial institution will allow to lend you.
The next section will cover what resources you can use for your down payment. Use worksheet 2 to help you calculate you available cash and assets.
Your down payment
For first time homebuyers, the price of a home is dictated by the amount of money they have put aside for a down payment, since they haven’t built any equity. If you haven’t been saving money to buy a home you may want to begin putting money aside from every paycheck.
Your borrowing power
Other than your down payment, the main factor limiting the price of your house will be how much you can borrow. When applying for a mortgage loan, the mortgage lender will largely consider two factors in deciding how large a loan to allow you:
Earnings
Existing debt
Lender’s qualifying guidelines
The mortgage lender considers your debt-to-income ratio, which is a comparison of your gross (pre-tax) income to housing and non-housing expenses.
Non-housing expenses include such long-term debts as car or student loan payments, alimony, or child support.
According to the FHA, monthly mortgage payments when buying a home should be no more than 29% of gross income, while the mortgage payment, combined with non-housing expenses, 4 should total no more than 41% of income.
For more information or to apply for a FHA loan
The lender also considers cash available for down payment and closing costs, credit history, etc. when determining your maximum loan amount.
Pre-qualifying
Pre-qualification is an informal way to see how much you maybe able to borrow. You can be 'pre-qualified' over the phone with no paperwork by telling a lender your income, your long-term debts, and how large a down payment you can afford.
Without any obligation, this helps you arrive at a ballpark figure of the amount you may have available to spend when buying a home. Use worksheet 5 to pre qualify yourself.
Free mortgage loan pre qualifications for the following types of mortgages available below:
FHA Loans
VA Loans
CalPERS Loans
Your gross income.
All these sources count as income, your gross income is all of your income added up before taxes.
Seasonal pay
Child support
Retirement pension payments
Unemployment compensation
VA benefits
Military pay
Social Security income
Alimony
Rent paid by family
Part-time pay
Overtime, and bonus pay also count as long as they are steady.
Use worksheet 3 to find your gross monthly income.
Your debt payments. Mortgage lenders will also take into account your existing debt in determining how large a mortgage you can apply for.
If monthly debt payments are too much for your income level, this will decrease the amount you can borrow to buy a house. For every $60 of “excess debt”, you can expect about $6,000 reduction in the amount of mortgage you qualify for. Consider paying off a portion of your debt in preparation for buying a home if your debts are excessive. Use worksheet 4 to determine your monthly debt payment.
Learn more about debt ratios for specific types of mortgage loans by clicking on loan type below:
FHA Loans debt ratio guidelines
VA Loans debt ratio guidelines
CalPERS Loans debt ratio guidelines
Your credit record
A mortgage lender will order a credit check to assess your request for a loan. The credit report gives mortgage lenders record of debts owed and duly repaid. Mortgage lenders verify the amount of debt you currently have, as well as the amount of credit available to you.
Learn more about credit qualifying guidelines of various loan programs, click on the loan type below:
FHA Loans
VA Loans
CalPERS Loans
You can ask for your credit profile from a “credit reporting agency”
CREDIT REPORTING COMPANIES
Company Name
Phone Number
Experian
1-888-524-3666
Equifax
1-800-685-1111
Trans Union
1-800-916-8800
Below are some links to websites that allow you to receive a copy of your credit report online instantly.
Free Credit Report from Equifax
Get a Three Bureau Credit Report Instantly
3-Bureau Credit Report from CreditReporting.com
Establishing a credit history
If you do not have a traditional credit record, it is still possible to set up a credit history that illustrates payments made on credit card purchases, a car loan, or a student loan. You can develop a nontraditional credit history by keeping a record of these monthly payments:
Rent
Electric
Gas
Water
Telephone
Cable television companies
Medical insurance
Automobile insurance
Life insurance
Repairing a bad credit report background
If your credit report has bad marks on it or you are presently having credit problems, you may not be in a position to buy a home until they are resolved.
Your record of keeping current on your debt payments may be credible if your credit problems are in the past. By law, the most unfavorable credit information should be dropped from your credit file after seven years, a bankruptcy should be dropped after ten years.
Correcting an erroneous credit profile
Sometimes credit reports are incorrect or provide misleading picture of past credit problems that have since been resolved.
If any errors appear on your credit report, you will have the chance to get them fixed before applying for a mortgage.
Below is a company that offers credit report cleaning services. View their offer.
If your credit is damaged? ClearCredit can help you get your credit report history back on track.
If you know you have good credit, continue learning about buying a home below.
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