Before you begin hunting for your dream home you need to determine how much house you can afford. The calculator at the bottom of this page will give you a good idea of how much a mortgage will cost you, but you really won’t know for certain until you speak with a mortgage lender.
What determines how much house you can afford?
Mortgage lenders will look at a lot of different factors when determining what you qualify for.
- Income: Money that you earn from your job, from a business, or from any investments.
- Savings: Any savings, investments, or other forms of capital you have available to you to help with a down payment or any emergency in the future.
- Debt: Any credit card, student loan, or other debt.
- Credit History & Employment: Most lenders will simply check your credit score & verify employment. If you have a limited credit history they may do what is called manual underwriting, which is a more involved process of learning how reliable you have been in paying your debts in the past.
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General Rule of Thumb
What you qualify for & what you can afford can often be two different numbers. Everyone’s situation is different, but here are a few common rules of thumb:
Nerdwallet.com recommends that you use the 28%/36% rule. The rule states that you shouldn’t spend more than 28% of your gross monthly income on home-related costs and 36% on total debts, including your mortgage, credit cards and other debts. For example if you earn $6,000 a month and have no debt, your monthly mortgage payment should not exceed $1,680.
Dave Ramsey recommends that your monthly payment on a 15 year (fixed rate) mortgage not exceed 25% of your net take-home pay. He also recommends that you are completely debt-free, have an emergency fund of 3-6 months of expenses, and save 10-20% for a down payment.
What documents will I need?
A mortgage lender is going to ask you for a lot of information. Here’s a checklist to get you on your way to buying the home of your dreams:
- Personal documents
You’ll need two forms of government-issued ID, your social security number, divorce papers if applicable, as well as proof of ownership of other property.
- Review your credit report
You should be able to do this free of charge. Be sure to dispute any errors or provide an explanation for late payments or derogatory items. Then, keep your credit score healthy by avoiding any new credit inquiries, canceling any credit accounts, or lowering limits with any creditors. Doing any of these things could lower your credit score.
- Tax returns
You’ll need to provide tax returns for the previous year, and potentially for the last two years.
- Proof of income
Gather W2s, paycheck stubs, 1099s, or a year-to-date profit and loss statement if you’re self-employed. You’ll also need to show other income sources such as Social Security, child support (and proof children’s ages), or government assistance.
- Proof of assets
Provide bank statements, mutual fund statements, account balances for retirement accounts, 401Ks, IRAs, and any money held in the stock market.
- Debt summary
You’ll need to provide a summary of your debts, monthly payment amounts, child support payments and balances for credit cards, student loans, car loans, other property loans.
- Financial issues
You may need to provide a written explanation if you’ve had bankruptcy or other financial issues in the past.
- Down payment and closing money ready
Have these funds ready in your bank account. If you received this money as a gift, you might need to provide a letter from the gifter explaining the gift is not a loan.
Compile proof for the past year with canceled checks or money orders to show rent was paid on time.
- Mortgage pre-approval successful
Do some comparison shopping and contact other lenders. A home is likely the largest purchase you’ll ever make, do your homework to ensure you get a competitive deal.
Having years of experience on the market, we’ve learned how important a trustworthy mortgage lender is during your real estate journey. Put your faith in a leading lender awarded for the exquisite customer service and appreciated for the competitive offers. Choose the business that pair knowledge, individual approach, and integrity, taking care of the most satisfactory results for you.
Applying for your first mortgage? Get in touch with me! I would be happy to walk you through the process and help you find a mortgage lender you can trust.