To determine how much you can afford for a home, check your budget carefully. Review your bank statements and spending habits over the past few months to find out how much you’re spending on everything from cell phone bills to restaurants. The Consumer Financial Protection Bureau offers expense tracking that can help you determine where your money is going each month.
Once you have a better idea of your spending habits, determine how much you want to spend on your monthly house payment. This figure includes the principal payment, interest, taxes and insurance, which are added to the monthly mortgage amount.
The Federal Housing Administration formula, used by many lenders, recommends earmarking no more than 31 percent of monthly income to pay for the house. This figure will change depending on the amount of your debt. Buyers with no other debt can pay up to 40% of their monthly income on the home. (But remember, the rest of the budget will have to go to heating, water, electricity, routine home maintenance, and food.) Exceed 43 percent.
So, for example, if you earn $ 50,000 in gross annual income, your gross monthly income will be $ 4,167. That should leave you with $ 1,292, or 31% to spend on your monthly mortgage, as long as your total debt doesn’t exceed $ 1,792 per month. Our mortgage calculator can help you determine what your monthly mortgage might be.
But remember that in addition to the mortgage, buying a home includes additional one-time payments that can add up quickly, including closing costs, legal fees and other expenses associated with the purchase, such as a home inspection. And don’t forget to shift taxes or improve your home.
Count your pennies
Have you decided to buy? Before launching into the world of open houses and real estate agents, take the time to get your finances in order. It will help you once it is time to apply for a mortgage. It will also help you gain a financial perspective before falling in love with that perfect downtown colonial living room or studio overlooking the park.
Check your credit score
Lenders use credit scores, also known as FICO scores, to gauge the potential risk of lending to you. The higher the number, ranging from 300 to 850, the better your score will be. The best mortgage rates are for borrowers with medium to high credit scores of 700 or more, according to the Consumer Financial Protection Bureau.
To find out where you are, visit annualcreditreport.com, which offers a free report every year. Please note that the three major credit reporting agencies, Equifax, Experian, and TransUnion, generate their FICO scores based on the data they collect; you can find out all three here.
Is your FICO score low? You can improve your score by paying off high credit card debt and cleaning up any financial errors, such as errors resulting from identity theft or confusing files belonging to someone else with the same or similar name. Keep in mind that it takes time for these changes to reflect on your credit score, from months for an inaccurate bill to years if you’ve had tax liens or bankruptcies. But if you can free up your credit, it can make a big difference to your mortgage rate.