How Much Home Can You Really Afford?

How much you can afford?  Depending on your situation, a budget can affect everything from your new neighborhood, to the typ of home, and even the type of financing.

However, lenders will look at more than your total income. You will find that different lenders have different programs and differnt types of financing available to you.

Do you know the difference between a loan Prequalification vs. loan Preapproval

One of the best ways to determine your budget is to have your real estate broker or mortagage lender prequalify you. Prequalification is different from preapproval, because it is only an estimate of what you'll be able to afford. Preapproval is a process where a lender examines your finances and agrees in advance to loan you a specified amount pf money.

What factors are important to lenders?

Banks and lending institutions will use several criteria to determine how much money they'll lend. These include:

1. Your gross monthly income
2. Your credit history
3. The amount of your outstanding debts
4. Your savings--or the amount of money you have available for a down payment and closing costs
5. Your choice of mortgage (i.e. 30-year, FHA, etc.)
6. Current interest rates

Ratios:

Lenders use your financial information to figure out ratios: the debt-to-income ratio and housing expense ratio.

• Your Debt-to-income
  Lenders use a rule of thumb that the amount of debt you are paying on each month (car payment, student loan, credit card, etc,) shouldn't exceed more than 36 to 38 percent of your gross monthly income. FHA loans are slightly more lenient.
  
  
• Your Housing expense
  It is generally difficult to obtain a loan if the mortgage payment will be more than 28 to 33 percent of your gross monthly income.
  

Your Down Payment
Of course all lenders like a large down payment, but how many of us really can afford to do this?  The answer is, not many.  If you happen to be one of those that can, then the lender may be more lenient. Someone with a 20 percent down payment may be qualified with the 33 percent housing expense ratio, while someone with a 5 percent down payment is held to a 28 percent ratio.

Ways to improve your purchasing power

• Gifts
  If you're having trouble saving money, some lenders may allow you to get gift funds for the down payment and closing costs. However, most lenders require a "gift letter" stating the gift doesn't have to be repaid, and will also require you to pay at least a portion of the down payment with your own cash.
  
  
• Negotiating Closing Costs
  Through negotiation, some sellers may agree to pay all or most of your closing costs (for example, if you agree to meet their full asking price). If you choose to try this, make sure to ask your real estate agent for advice.
  
  
• Loan Programs
  Many local governments have special loan programs designed to help first-time homebuyers. Loans may be available at reduced interest rates, or with little or no down payments. Check with your local housing authority for more information.
  
  
• Loan Types
  Some homebuyers choose Adjustable Rate Mortgages (ARMs) because of low initial interest rates. Others opt for 30-year loans because they have lower monthly payments than 15-year loans. There are significant differences between different loans, so make sure to discuss the pros and cons of different loans with your agent or lender before making a decision.