How Much House Can I Afford?
It is a poor decision to begin house hunting without knowing how much you can afford. Don’t start house hunting until you seriously consider how much you can afford to pay. Purchasing a house is an exciting milestone in a persons life. But you should be sure to know how much you can afford before you begin; otherwise, you may be disappointed when you don’t get your dream home, or discover you can’t afford one at all.
Lenders have developed a formula that says you can afford a house worth about three times your annual income.However, you should be honest to yourself about your own budget of what you can afford. Be sure to not exclude factoring in taxes, insurance, maintenance, or renovations.
Check Your Credit History
When reviewing loan applications and making financing decisions, lenders typically request that the three credit bureaus—Experian, Equifax, and Transunion. Many will use your FICO score, which is a calculated combination of the three.
It should be common knowledge that the better your credit score, the easier it will be to get a loan. To get the best interest rates, lenders will want to see a credit score of at least 740. If your score is lower than 620, you may not qualify for a loan at all. If you have a poor or flawed credit score, consider waiting to apply for that loan until time has passed for some of those poor marks to fall off.
Loan Pre-approval vs. Loan Pre-qualification
Once you’ve done the basic calculations and completed a financial statement, you should ask the prospective lender or loan broker for a pre-qualification letter saying that loan approval for a specified amount that is based on your income and credit history. Pre-qualifying lets you determine approximately how much you’ll be able to borrow and how much you’ll need for a down payment and closing costs.
You should also try to be pre-approved for a specific loan amount. This means a lender has already indicated a specific amount of money they will approve for a loan, based on having checked your credit and evaluated your financial situation.
Pre-approval isn’t a guarantee that that the lender would actually fund the loan, but it’s as close as you’re going to get to one, and a seller will absolutely want to see it, if not insist. The lender will make actual loan approval conditional on an appraisal of the property, a title report, and other conditions.
CreditKarma is also a great tool to find live reviews of mortgage lenders that homeowners have used when financing their home. Be sure to create an account, if you haven’t done so already, as this is a great website that will help you make informed decisions.