How much house can I afford?
Figure out how much house you can afford with a mortgage calculator and the 28/36 rule. Learn the factors that affect your mortgage eligibility.
Ashley Eneriz
Demystifying the homebuying process
For most aspiring homeowners, obtaining a mortgage is an essential step in buying a house. Mortgages are typically large loans with long loan terms, so it’s essential to understand the basics of a mortgage and how it works before you make this significant commitment. You want to make sure you get the home loan that’s right for you.
A mortgage is a contract between a lender and a borrower for a loan used to purchase a property. The purchased property is used to secure the loan, which gives the lender the legal right to repossess the property and sell it if a borrower fails to make their mortgage payments. Most people have to take out a mortgage to buy a home or refinance.
Mortgages, like other loans, accrue interest throughout the loan term and have other fees and costs. A mortgage consists of a few basic elements:
The mortgage rate is the interest rate you pay to borrow the money, expressed as an annual percentage of your total loan amount. Essentially, the interest is the profit your lender earns for giving you money.
The annual percentage rate (APR) is an annual percentage of the loan amount that more broadly measures how much you’ll pay to take out a mortgage. APRs are higher than mortgage rates because they include interest plus other fees.
The loan term is the period of time you have to pay back the mortgage. If a borrower pays the loan off in full within this time frame, the loan balance moves to zero after the last month of the term.
Common loan terms are 15 years and 30 years, though there are also other options (like 10-year and 20-year terms.)
The loan amount is the amount you borrow to cover the purchase price of the property. The loan amount is the sales price of the home minus the down payment.
The repayment of a mortgage includes the principal loan amount you borrowed and the interest accrued. A mortgage is paid off in a series of payments over the agreed-upon loan term.
Interest-only repayment is exactly what it sounds like: a payment you make that covers only the interest. Interest-only mortgages have interest-only payments for a set amount of time before you begin to pay the principal.
Closing costs are fees you pay to the lender during the home sale. These costs include discount points, the origination fee, loan processing fees, underwriting fees, loan funding fees and document preparation fees. This cost also includes title, appraisal, survey and recording fees.
Closing costs vary depending on the mortgage type and location. However, the typical range is between 2% and 6% of the loan amount. So, if your mortgage amount is $250,000, the closing costs might be anywhere between $5,000 and $15,000.
Mortgage insurance protects the lender in case the borrower defaults on the loan. The specifics of your mortgage insurance depend on the type of home loan. If your down payment on a conventional mortgage is lower than 20%, the lender may require monthly private mortgage insurance (PMI) until you have enough equity in the property. If you get an FHA loan, you pay mortgage insurance premiums to the Federal Housing Administration, including an upfront and monthly payment.
There are several mortgage types to choose from. Mortgage rates are either fixed (stable rate over the course of the loan) or adjustable (relatively lower fixed rate for a temporary period before adjusting at predetermined intervals).
A popular mortgage option is the 30-year home loan. With this longer term, you pay higher more interest, but your monthly payments are lower. Some lenders and banks also offer 40-year mortgage options, but these are rare.
The 10-year mortgage is often the shortest-term home loan available to borrowers. A 10- or 15-year mortgage comes with a lower interest rate — and you’ll pay less interest overall — than a long-term loan, but you'll pay more each month because of the shorter term.
A conventional loan is a privately backed loan (meaning it’s not backed by the government, which makes it riskier for lenders). Conventional loan programs typically require a credit score of at least 620 and a down payment of at least 3%. However, if you put down 20% or more, you can avoid paying PMI.
Conventional loans can be conforming or nonconforming. A conforming loan adheres to rules from Fannie Mae, Freddie Mac and the Federal Housing Finance Agency, while a nonconforming loan does not meet these requirements. Jumbo loans are generally nonconforming loans that have higher borrowing amounts and require good credit and a large down payment.
Government-backed loans are loans insured by the government in case the borrower defaults. This makes it easier for the private lender to approve applicants. Government-backed loan options include FHA, VA and USDA loans.
FHA loans are backed by the Federal Housing Administration. You can obtain an FHA loan with a credit score as low as 500 and a minimum 3.5% down payment for those with good credit. They do require FHA mortgage insurance, regardless of how much you put down. FHA loans are popular among first-time homebuyers and those with less-than-ideal credit.
VA loans, which are guaranteed by the U.S. Department of Veterans Affairs, are meant for eligible retired and active-duty military personnel and surviving spouses. In most cases, they don’t require a down payment or mortgage insurance. Often, a borrower needs to pay the VA funding fee, though there are exemptions.
Loans backed by the U.S. Department of Agriculture (USDA) are designed for low- to moderate-earning borrowers. These loans finance home purchases in designated rural locations. USDA loans don’t require a down payment and aren’t limited to first-time homebuyers.
The mortgage loan process can be challenging to navigate, especially if you’re a first–time home buyer. It’s helpful to learn about the process before getting into it so you know what to expect.
Instead of determining the maximum purchase price possible, it’s better to estimate what monthly payments you can manage reasonably. Once you know this figure, check out the current mortgage rates to start determining your homebuying power.
The primary focus of the processor involves the “three C’s” of underwriting:
During processing, the mortgage lender may come back with some more questions for you. Do your best to respond to provide answers quickly to keep closing on track.
With any type of loan, there are specific requirements for qualification. These will depend on the lender, the type of loan and your personal financial profile, including your credit score, debt-to-income ratio, monthly income and down payment amount.
A credit score is critical in taking out a mortgage. It reflects how you’ve managed various credit accounts throughout your financial history. Having a higher credit score can help you qualify for a lower interest rate.
FICO Score minimums for most lenders:
Your debt-to-income ratio (DTI) is the total of your monthly debt payments divided by your gross monthly income. DTI helps lenders evaluate your ability to make your loan payment each month.
It’s important to be able to show your mortgage lender you have a sufficient and stable income. Lenders review your pay stubs, income tax returns, W-2s and other documents showing your earnings. They might also consider how often you’ve switched jobs and how long you’ve worked in a particular field.
A down payment is the amount of money you pay out of pocket upfront to purchase a home. Not all loan programs require borrowers to make a down payment. Making a bigger down payment means you borrow less money and make smaller monthly mortgage payments; you may qualify for a lower interest rate and avoid paying private mortgage insurance.
Most people don’t have the option of buying a home without the help of a mortgage. If you’re trying to decide whether getting a mortgage is right for you, here are some benefits and drawbacks to consider.
Yes, you can buy a house with cash and avoid the process and fees that accompany a mortgage. Being a cash buyer may make you more attractive to the seller because they don’t have to worry about financing breaking down at the last second. A seller might even be more willing to negotiate with a cash buyer. However, there are some drawbacks to paying with cash, such as having more of your money tied up in the property.
Mortgage rates change frequently, but we collect the most recent interest rates for popular loans each day.
It depends on factors such as how much you have in savings, your monthly budget, the type of mortgage loan you get and current market conditions. By putting down a larger down payment, you’ll end up borrowing less and might qualify for lower rates. But, you also end up having less money available for other purposes or an emergency. The median down payment on a home from mid-2019 to mid-2020 was 12%, according to the National Association of Realtors.
To estimate how much house you can afford, it can be helpful to use the 28/36 rule. The rule states that your housing expenses shouldn’t exceed 28% of your gross income, and your total monthly debt payments shouldn’t exceed 36% of your gross monthly income.
A mortgage is the only path to homeownership for most of us. Applying for a mortgage is a good idea if you can afford the down payment, monthly payments, closing costs and the overall cost of homeownership.
However, keep in mind that a mortgage loan is a significant debt that uses your property as collateral. Before you take out a mortgage, examine your personal finances closely and educate yourself as much as possible about home loans. Once you’re ready to apply, compare offers from a variety of lenders to get the best deal possible.
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