Mortgages are one of the biggest investments you’ll ever make, so it’s essential to find the best loan for you based on what you can afford. Our affordability calculator below can help determine your budget and purchase price based on income, debts, down payment amount and more.
Credit score and Down Payment
Your credit score is an essential factor in qualifying for a mortgage. A higher or more consistent score could mean lower interest rates and reduced payments overall. Furthermore, having good credit prior to applying can help expedite approval processes and minimize loan processing times.
Maintaining your monthly income and expenses stable is an effective way to guarantee you can afford your new home. Lenders want assurance that you will pay all bills on time each month, including mortgage, rent, utilities, groceries, debt payments and other essentials. If your income fluctuates drastically month to month or expenses are unpredictable, you may need to consider downsizing into a lower-priced house where you can live comfortably without making other sacrifices in other parts of your budget.
Debt-to-income ratio (DTI) is another important factor lenders use when calculating your affordability for a mortgage. As a general guideline, your total debt payments – including projected mortgage, property taxes and homeowners insurance – should never exceed 36% of pre-tax income.
Before visiting a home, use a mortgage calculator to estimate your payment. Make sure to factor in all other costs associated with buying a property – like property taxes and homeowner’s insurance premiums (if applicable) – into the equation as these recurring fees will accumulate over the life of your loan; thus, include them when making your calculations.
The length of your loan term can also affect your payment. The most popular option is a 30-year fixed-rate mortgage, but shorter loans like 15- or 10-year options can save money on interest and reduce overall expenses.
When selecting the term of your loan, be sure to factor in the cost of discount points that could reduce your interest rate by 1 percent. However, discount points can be expensive and their break-even point often comes years down the line, making them not always worthwhile investments.
Other Mortgage Types
Looking to purchase a home that falls outside the conforming loan limits established by Fannie Mae and Freddie Mac? You may need to investigate non-conforming or “jumbo” loans. Typically, these non-conforming or “jumbo” loans require 10-20% down payment with lower interest rates than conventional mortgages.
Selecting a Lender
Before beginning the mortgage application process, research local mortgage lenders in your area. Make sure they offer you the appropriate type of home loan and offer reliable customer service.