Most homebuyers find that they need to finance at least part of their home purchase. Therefore, the first stage in finding the right home is to review your personal financial situation and make an informed estimate of your true purchasing power.
Your purchasing power will depend on:
- Your Income
- Your Credit Rating
- Other Monthly Expenses
- Your Down Payment
- Available Interest Rates
How Much Home Can You Buy?
The next four steps discussed will help you review home financing and get you prepared to speak in detail with a lender. A more thorough overview of the financing process is covered later in this guide.
Step 1: Make a rough estimate of how much home you can afford based on your income.
Here are a two methods that will give you an approximate starting point for how much home you can afford.
Method 1: The price of your home shouldn’t be any more than 2.5 times your annual salary.
| ANNUAL SALARY | MAXIMUM HOME VALUE |
| $50000 | $125,000 |
| $60000 | $150000 |
| $70,000 | $175000 |
| $80000 | $200,000 |
| $90,000 | $225000 |
| $100,000 | $250000 |
| $110000 | $275000 |
| $120000 | $300000 |
| $130000 | $325000 |
| $140000 | $350000 |
| $150000 | $375000 |
| $160,000 | $400000 |
Method 2: A house payment should be no more than 25% of your gross monthly income (before taxes and deductions).
| Annual Salary | Gross Monthly Income | Maximum House Payment |
| $50,000 | $4,167 | $1,250 |
| $60,000 | $5,000 | $1,500 |
| $70,000 | $5,833 | $1,750 |
| $80,000 | $6,667 | $2,000 |
| $90,000 | $7,500 | $2,250 |
| $100,000 | $8,333 | $2,500 |
| $110,000 | $9,167 | $2,750 |
| $120,000 | $10,000 | $3,000 |
| $130,000 | $10,833 | $3,250 |
| $140,000 | $11,667 | $3,500 |
| $150,000 | $12,500 | $3,750 |
| $160,000 | $13,333 | $4,000 |
Keep in mind that these are guidelines. There are many other factors that determine how much home you can afford.
Step 2: Take a close look at your credit report.
Your Credit History is one of the principal measures used by a lender to determine your interest rate. The better your credit, the better lending terms your bank or lending institution will be able to offer you. A higher interest rate translates into a higher monthly mortgage payment, and so your credit score will directly affect how much money you can borrow and at which homes you should be looking.
You should be aware of what information is on your credit report by obtaining and reviewing copies of your credit report from the three main credit report agencies.
| Equifax | TransUnion | Experian |
| www.equifax.com | www.transunion.com | www.experian.com |
| 1.888.766.0008 | 1.800.888.4213 | 1.888.397.3742 |
Remember that there are several factors that affect your credit report including your payment history, your current ratio of debt to income and signs of responsibility and stability. And since not all creditors report to all three agencies, it’s best to order a report from all three institutions.
Your goal in ordering all three credit reports is to make sure that all of the information stated on each report is accurate and correct.
If there are any discrepancies on your credit report, it’s important that you contact the rating agencies and have those records corrected. Taking the time to verify and correct your credit report before you speak to a lender will help eliminate hassles later on.
How Does Your Score Rate?
| Exceptional | Above 780 |
| Great | 740-780 |
| Good | 690-740 |
| Fair | 620-690 |
| Low | Below 620 |
The average credit score in the US is 687.
Step 3: Gather the Documents / Take a look at your Assets and Monthly Expenses
Your lending institution will ask you to give a complete profile of your financial situation. In addition to your income, your existing assets and debts will determine how much money that you can borrow.
Below you’ll find a list of documents you may be required to produce regarding your financial situation when you speak to a lender. It is a good idea to gather these things now and have them on hand. You will need to provide this information for all primary and coborrowers.
- Social Security Number
- W2 Forms from the previous two years
- Pay Stubs (most recent months)
- Employment History Summary
- Bank statements for checking and savings accounts (past 3 months)
- Creditor Information. This includes debts like:
- Student Loans
- Auto Loans
- Credit Cards
- Federal Tax Returns (for the past 2 years)
- Complete Record of Assets
- Stocks, bond, and investment accounts
- IRA / Retirement plan
- Life insurance policies
- Automobiles owned
- Construction loan
- Gift letters
- Documentation of other income
- Child Support Payments
What Not To Do
There are a few actions that you can take that will negatively affect your credit score and therefore your home purchasing power. If at all possible, you should avoid making a major purchase or changing your job if you’re seriously considering buying a home in the next few months,
Improving any of these areas will help you qualify for better lending terms, so keep that in mind before you speak with a mortgage professional. If it’s possible to pay off a car loan or a credit card balance before you seek financing for your new home, the preferential financing terms that you could receive may save you thousands of dollars over the life of your mortgage.
Step 4: Talk to a Qualified Lender
After looking at this information for yourself, it’s time to speak to a qualified lender. A professional advisor will not only be able to give you information on the best rates and terms available in the current market, but he or she can also explain to you what options you have given your unique financial situation.
Talking to a lender at this time will help you get a more accurate idea of what you can afford. When we begin to look seriously at homes you’ll go back to the lender and shop around for the best loan available. If you’re still looking for a qualified and experienced lending professional, I’d recommend you speak to:
Eric Rosemary with Cross Country Mortgage (561) 504-4116
Next…Which Home Is Right for you
