Factors To Consider When Purchasing A Home

Factors To Consider When Purchasing A Home

Your Debt-To-Income Ratio

When determining what you can and cannot afford in a house, looking at your monthly and annual income compared to your overall expenses can help give you an idea of your financial ability to purchase a home. This is known as your debt-to-income ratio, and it’s the percentage of your pretax income that goes toward paying your rent, mortgage, credit card bills and any other debt you may have accumulated.

Ideally, every household should follow the 28/36 rule, which says a household should spend a maximum of 28 percent of its gross monthly income on housing expenses and no more than 36 percent on debt service, according to Investopedia. By following this rule, you can help improve the chances of lenders such as Newrez approving your application for a mortgage loan.

To calculate your debt-to-income ratio, add up all of your monthly bills and divide that number by the total of your gross monthly income. The lower this number is, the less risky you are to mortgage lenders. This is an important tool in determining your financial health and how much you’ll be able to spend on a mortgage payment each month.

Your Credit Score

Having a good-to-excellent credit score is essential for buying a house. In most buying situations, you’ll need a credit score of at least 620 to secure a conventional mortgage loan. The better your credit score is, the better your chance of getting approved for a loan on favorable terms.

Making sufficient, on-time payments toward your bills and debts each month is a good way to improve and maintain your credit score. Having a high credit score allows you to get a conventional mortgage with more competitive interest rates and flexible repayment periods.

Some government-backed Federal Housing Authority (FHA) loans allow you to qualify with a credit score as low as 500. However, you may be required to put down a larger down payment and/or get a private mortgage insurance policy to accompany it.

Your Current Savings And Assets

One of the most important factors in determining how much you can afford to spend on a house is the down payment you plan to provide. The higher the property price, the larger the required down payment will be, even if you’re exploring low-down-payment options such as an FHA loan. Conversely, the higher your upfront down payment, the lower your monthly mortgage payment will be.

When you make a down payment, you’ll need to have that money available as cash, so consider your current savings and your ability to continue to save as you continue your home search. If you are selling another property or high-value assets to finance your down payment, consider the timing of those sales to ensure you will have the funds available to use when you need them.

Your Loan-To-Value Ratio

Closely connected to your down payment amount is your potential loan-to-value (LTV) ratio. This is a metric that measures the amount of debt a homeowner will use to buy a home compared to its value.

Your LTV ratio is calculated through a formula that measures how much financing is used to buy the home relative to its value. A loan-to-value ratio also shows lenders how much equity the borrower has in the home that they’ve borrowed against. For those who are looking to buy a home, a ratio of 80 percent is considered good. If your LTV ratio is higher than this, you will likely need to get mortgage insurance.

Property Taxes

Property taxes vary from state to state and even city to city, so it’s important to do your research and understand the average tax payments in the neighborhoods you’re scoping out. Looking one or two towns over could mean a difference of thousands of dollars per year in real estate taxes, which could significantly impact your monthly mortgage payments.

Type Of Mortgage

Once you have a complete understanding of your financial situation, you can then begin to consider your options for the types of mortgages available to you. The type of mortgage loan you get can greatly impact the amount you pay on your house each month.

• Fixed-rate mortgages. Borrowers will pay the same interest rate for the entire term of your mortgage — typically 15, 20 or 30 years. This means the amount of your mortgage payment going toward interest will follow a predictable amortization schedule.
• Adjustable-rate mortgages. With this type of mortgage, the interest rate changes throughout the life of the loan. It is typically fixed at the lowest rate for the initial five, seven or 10 years of the term and goes up from there, meaning your payment may fluctuate.
• FHA mortgages. As mentioned above, FHA mortgages are government-assisted loans that allow borrowers to put less money down or secure a loan with a lower credit score.
• VA loans. These mortgages are available to veterans, active service members, National Guard, reservists and spouses through the U.S. Department of Veterans Affairs and may allow borrowers to buy a home with no money down.
• Conventional loans. For borrowers with a higher credit score, conventional loans allow for lower down payment options and competitive interest rates.

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