Buying a new home – especially if it is your first home – can be an exciting adventure.
But before you go looking, it’s crucial to consider things like your credit score, the down payment, and your overall home affordability.
So we’ve listed a few of the big financial steps to help you find a house that both your heart and your budget will love.
Estimate How Much Money You Need for a Down Payment
No surprise here – you need a down payment almost any time you buy a house. The only typical exception is if you are buying a home with a VA loan.
Figure out what you’d be comfortable with putting down on a home. You don’t necessarily have to make a down payment of 20% of the value of the home to buy a house, although you will probably have to purchase private mortgage insurance (PMI) if you do.
Check Your Credit Score and Debt-to-Income Ratio
These are two of the biggest factors that lenders assess to help them decide whether to approve you for a mortgage and what terms to offer.
Your credit score is an estimate of how likely you are to pay your debts on time. Your debt-to-income ratio (or “DTI”) is a calculation of all your monthly debts divided by your monthly income. Your debt-to-income ratio can include things like student loans or credit card debt in addition to the amount of money you may borrow to buy a house.
Generally speaking, the higher your credit score and the lower your DTI, the better. It’s easier to not only get approved for a mortgage, but to also qualify for lower rates.
Don’t Forget the Costs of Owning a Home
The cost of the house is not only the cost of homeownership. Sometimes people talk about being “house poor” – which means they are spending so much of their income on their loan, they don’t have funds for things such as home maintenance, a rainy day fund, or college tuition.
That’s why we encourage you to think about the “big picture” of your finances when considering buying a home.
Try Our Home Affordability Calculator
For a ballpark figure of how much house you can afford, check out our Home Affordability Calculator. This user-friendly online tool allows you to enter the important factors we discussed above –down payment, monthly debts, and more – and gives you an estimate of how much home you can afford, in addition to what your monthly payment might look like.
The calculator is interactive, so you can also see how varying mortgage rates and loan terms can affect your home affordability.
Start plugging in your info into the Home Affordability Calculator now!