First Time Home Buyer - How Much Can I Afford?
I am assuming that your real question is; "How much would a lender be willing to loan me to buy a house?" Truth is, how much can I afford is too generic of a question.
You can probably afford as much or little as you are comfortable with.
However, when it comes to borrowing money you have to use the "Golden Rule".
"He who has the gold, makes the rules!" You can visit many websites where you can find an affordability calculator which will give you a bird's-eye view as to what a lender will be willing to loan you based on "everything is a perfect world" principals.
However, you and I both know that we do not live in a perfect world and every single person has a unique situation.
Before you find out how much you can afford you need to make sure to answer the first question; should you continue to rent or buy a home.
As appealing as owning your home may sound it is NOT right for everyone.
In fact, in today's fast pace world that changes rapidly, it may make more sense to continue to rent.
This is a question only you can answer but you need to be fully educated to determine the answer.
In the old days you could afford to borrow any amount you wanted.
As recently as three years ago if you could fog up a mirror with your breath lenders would loan you money.
Serious, that is no joke and of course that is what got us in this banking crises to begin with.
Lenders today are back to the hard nose decision makers that you use to see in the movies.
Don't be fooled, lenders still have money to lend and that is how they make their money.
It's just that they are back to relying on the formulas and guidelines that worked before the sub-prime days.
To answer your question; "How Much Can I Afford?" you must take several factors into consideration.
The lenders will also look at...
Are you willing to part with your cash to reduce the banks risk - Lenders want to make sure that you have some skin in the game.
Yes, it is possible to borrow money with no down payment but that money is hard to come by and will cost you a lot in interest rates.
Don't be alarmed, finding the 3.
5% you will need as a down payment is a lot easier than you think.
You can even turn to your 401(k) plan if you are a first time home buyer (someone that has not owned a home in the previous three years).
You can pull this money out, pay taxes but no penalty.
After all, how well has that plan been performing lately.
(Don't get me started, I have always been a strong advocate against saving in 401(k)s or other work sponsored plans.
However, that is an entirely different subject and I will leave it to you.
Of course, I am right about that...
LOL!) What are the current interest rates for prime 'A' borrowers - Interest rates have a direct impact on how much house you can afford.
When rates are lower you qualify for a larger purchase price.
Conversely, when rates rise, you qualify for less.
Truth be told, in the good old days (before the current real estate crises) this had little effect due to the fact that home prices would also rise and drop with interest rate movements.
Understand this, if you qualify for say an FHA home loan then you qualify and you should get the same rate as everyone else.
Don't let the lender scam you.
When you use an online calculator you will need to plug in a loan interest rate, just read the paper to find prevailing interest rates.
Remember that just because you qualify for X amount today does not mean you will qualify for that same amount tomorrow.
Rates change hourly, daily, weekly, monthly, annually and how much you qualify for will change as well.
The type of loan you are looking at will change your qualifications - Fixed, adjustable or a buy-down rate.
Are you looking for a fifteen, twenty, or thirty year term.
Are you buying an expensive home, in which case you will need a Jumbo Loan.
You can look at conventional financing, sub-prime financing, private lenders or a Government guaranteed loan.
The list of options is endless.
If you are a first time buyer I would recommend looking at FHA home loans.
If you are in the military, National Guard or Coast Guard take a look at VA loans.
Employment history and status- The longer you have been on your current job the more favorable the lenders will look at you.
If you have a history of changing jobs but you remain in the same field you will be okay.
A history of job jumping in different industries can raise some red flags.
Now here is one I could never figure out.
It is harder to get a home loan if you are self-employed as opposed to working for someone else.
Go figure, if I own my own business I will be the last person I lay off.
If you are self-employed you are going to have to jump through a heck of a lot more hoops to get a loan.
As a self-employed person myself, I try to write off everything I can so that my true income is not reflected on my tax statements (no, not cheating, just a benefit of being self-employed).
Because the banks look at your tax statements if you are self-employed they work the ratios based on your adjusted gross income on those statements.
Meaning, to borrow more money I would have to go a non-traditional route.
Of course you could just come up with more down payment but as you read more of my articles, you will discover that you really want to keep your down payment as low as possible.
Willingness to pay - This is where the rubber meets the road so to speak.
This is perhaps the part that freaks people out the most.
I am talking about your willingness to pay other creditors which is reflected on your credit report.
Lenders are not going to loan money to someone that has a history of neglecting their obligations.
The only way they can find this out is by pulling your credit report.
To get traditional conventional loan you are bottoming out at about 620.
There is no guaranteed that your credit is good enough even at 620 so hope you are in the 700s.
FHA home loans have much more flexibility when it comes to credit scores.
Of course their are private lenders and sub-prime lenders.
Suffice it to say, the lower your score the more down payment you are going to be required to come up with.
That is unless you buy a home without borrowing money from a lender (again, not in the scope of this article).
One of the first steps I would take as a potential home buyer is to pull a free credit report and hand this to your agent or loan officer.
Don't fret if your credit is not stellar at this point, you can always take action to clean your report or increase the score as you look for properties.
Believe it or not, this is not as hard as you may think and if you have a low score is not a bad idea even if you do not proceed with buying a home.
All that said you can see that your question; "How much can I afford?" could have many answers.
Hopefully I have provided you with some basics but take it with a grain of salt.
There are many variables that contribute to determining how much you can afford, or rather, how much a lender is willing to loan.
You can probably afford as much or little as you are comfortable with.
However, when it comes to borrowing money you have to use the "Golden Rule".
"He who has the gold, makes the rules!" You can visit many websites where you can find an affordability calculator which will give you a bird's-eye view as to what a lender will be willing to loan you based on "everything is a perfect world" principals.
However, you and I both know that we do not live in a perfect world and every single person has a unique situation.
Before you find out how much you can afford you need to make sure to answer the first question; should you continue to rent or buy a home.
As appealing as owning your home may sound it is NOT right for everyone.
In fact, in today's fast pace world that changes rapidly, it may make more sense to continue to rent.
This is a question only you can answer but you need to be fully educated to determine the answer.
In the old days you could afford to borrow any amount you wanted.
As recently as three years ago if you could fog up a mirror with your breath lenders would loan you money.
Serious, that is no joke and of course that is what got us in this banking crises to begin with.
Lenders today are back to the hard nose decision makers that you use to see in the movies.
Don't be fooled, lenders still have money to lend and that is how they make their money.
It's just that they are back to relying on the formulas and guidelines that worked before the sub-prime days.
To answer your question; "How Much Can I Afford?" you must take several factors into consideration.
The lenders will also look at...
Are you willing to part with your cash to reduce the banks risk - Lenders want to make sure that you have some skin in the game.
Yes, it is possible to borrow money with no down payment but that money is hard to come by and will cost you a lot in interest rates.
Don't be alarmed, finding the 3.
5% you will need as a down payment is a lot easier than you think.
You can even turn to your 401(k) plan if you are a first time home buyer (someone that has not owned a home in the previous three years).
You can pull this money out, pay taxes but no penalty.
After all, how well has that plan been performing lately.
(Don't get me started, I have always been a strong advocate against saving in 401(k)s or other work sponsored plans.
However, that is an entirely different subject and I will leave it to you.
Of course, I am right about that...
LOL!) What are the current interest rates for prime 'A' borrowers - Interest rates have a direct impact on how much house you can afford.
When rates are lower you qualify for a larger purchase price.
Conversely, when rates rise, you qualify for less.
Truth be told, in the good old days (before the current real estate crises) this had little effect due to the fact that home prices would also rise and drop with interest rate movements.
Understand this, if you qualify for say an FHA home loan then you qualify and you should get the same rate as everyone else.
Don't let the lender scam you.
When you use an online calculator you will need to plug in a loan interest rate, just read the paper to find prevailing interest rates.
Remember that just because you qualify for X amount today does not mean you will qualify for that same amount tomorrow.
Rates change hourly, daily, weekly, monthly, annually and how much you qualify for will change as well.
The type of loan you are looking at will change your qualifications - Fixed, adjustable or a buy-down rate.
Are you looking for a fifteen, twenty, or thirty year term.
Are you buying an expensive home, in which case you will need a Jumbo Loan.
You can look at conventional financing, sub-prime financing, private lenders or a Government guaranteed loan.
The list of options is endless.
If you are a first time buyer I would recommend looking at FHA home loans.
If you are in the military, National Guard or Coast Guard take a look at VA loans.
Employment history and status- The longer you have been on your current job the more favorable the lenders will look at you.
If you have a history of changing jobs but you remain in the same field you will be okay.
A history of job jumping in different industries can raise some red flags.
Now here is one I could never figure out.
It is harder to get a home loan if you are self-employed as opposed to working for someone else.
Go figure, if I own my own business I will be the last person I lay off.
If you are self-employed you are going to have to jump through a heck of a lot more hoops to get a loan.
As a self-employed person myself, I try to write off everything I can so that my true income is not reflected on my tax statements (no, not cheating, just a benefit of being self-employed).
Because the banks look at your tax statements if you are self-employed they work the ratios based on your adjusted gross income on those statements.
Meaning, to borrow more money I would have to go a non-traditional route.
Of course you could just come up with more down payment but as you read more of my articles, you will discover that you really want to keep your down payment as low as possible.
Willingness to pay - This is where the rubber meets the road so to speak.
This is perhaps the part that freaks people out the most.
I am talking about your willingness to pay other creditors which is reflected on your credit report.
Lenders are not going to loan money to someone that has a history of neglecting their obligations.
The only way they can find this out is by pulling your credit report.
To get traditional conventional loan you are bottoming out at about 620.
There is no guaranteed that your credit is good enough even at 620 so hope you are in the 700s.
FHA home loans have much more flexibility when it comes to credit scores.
Of course their are private lenders and sub-prime lenders.
Suffice it to say, the lower your score the more down payment you are going to be required to come up with.
That is unless you buy a home without borrowing money from a lender (again, not in the scope of this article).
One of the first steps I would take as a potential home buyer is to pull a free credit report and hand this to your agent or loan officer.
Don't fret if your credit is not stellar at this point, you can always take action to clean your report or increase the score as you look for properties.
Believe it or not, this is not as hard as you may think and if you have a low score is not a bad idea even if you do not proceed with buying a home.
All that said you can see that your question; "How much can I afford?" could have many answers.
Hopefully I have provided you with some basics but take it with a grain of salt.
There are many variables that contribute to determining how much you can afford, or rather, how much a lender is willing to loan.
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