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What Can you Afford?
There are typically three major areas of concern when deciding what you can afford: down payment, qualifying for a loan, and closing costs.
Down payment
A conventional loan typically requires a down payment. It is not uncommon for buyers to place a down payment of 10% to 20% of the purchase price. For example, on an $80,000 home, a down payment of $8,000 to $16,000 in cash may be warranted.
Government-backed loans, insured by the Federal Housing Administration (FHA) and the Veterans Administration (VA) are particularly useful to first-time buyers and often require 5% or less as a down payment.
Generally, a higher down payment means better loan terms and a lower interest expense on the mortgage.
Qualifying for a loan
A lender will determine how much they think you can afford. But remember, just because the lender says you can afford one price doesn't mean that's what you should spend. Be wise and thoroughly examine how much you should spend on a home.
Be prepared to provide the lender with a two- to five- year financial history that contains the following:
Income -- gross monthly income as well as employment history, education, and any secondary income such as bonuses, dividends, and child support. The lender may require a letter from your employer, W-2 forms, or, if you are self-employed, recent tax returns.
Assets -- current checking account balances, savings accounts, stocks and bonds, certificates of deposit, other property, insurance policies, and pension funds.
Credit -- debts on cars and appliances, debts on all credit cards, and history of debt repayment. Your lender may ask for a credit report, so you may want to clear up any known negative terms in advance.
Your REALTOR® can help you determine what price range and monthly payment you can afford. The monthly payment typically consists of principal, interest, taxes and insurance--PITI, for short.
Closing Costs and Other Costs
Purchasing a home involves a number services, and with them, fees. You should expect fees for appraisal, survey, inspections, hazard insurance, loan origination (lender's administrative costs), credit report, document preparation, title search and insurance, recording fees, notary, attorney, and escrow.
You will pay for some fees and the seller will pay for others. The costs will vary depending on each transaction. Most lenders will provide you with a good-faith estimate of such costs. Your REALTOR® can also help you estimate what those costs might be.
An item often confusing to first-time buyers is points. Points are interest collected in advance. One point equals 1% of the loan amount. For instance, three points on a $70,000 loan amount would be $2,100. By collecting points (interest) in advance, the lender increases his rate of return on the loan. So, if market interest rates are at 8.5% for a 30-year loan with no points a lender might offer you an alternative loan at 8% if you pay some points.
And don't forget about utilities and maintenance. These costs will vary depending on the home you choose, but it's a good idea to budget for them in advance.
Buying
a
Home
