Fine-tune your search by nailing down a realistic price tag.
Searching for the perfect house that checks off the boxes for location, amenities and more takes time. Which makes it all the more heartbreaking if you’re rejected for a mortgage on that dream home. Before you browse available listings, create a practical budget that can shed light on the monthly payment you an afford.
What in my budget will lenders look for?
Many lenders start with your debt-to-income ratio when determining whether you’re able to afford repaying a mortgage. True to its name, your DTI ratio is the total debt repayments you make each month divided by your income. Ideally, your DTI ratio should be under 40%, though competitive rates tend to go to those with an excellent DTI ratio of about 20% or lower.
When deciding whether to approve you, a lender looks at your car payments, insurance, credit card debt, student loan debt and any other bills you pay monthly. It considers whether your budget is reasonable enough to handle the addition of a mortgage repayment, homeowners insurance and, if you aren’t able to put down 20% of your loan up front, private mortgage insurance.
Rather than leave it to potential lenders, calculate on your own how much you spend each month against your existing bills and financial obligations. That way, you’ll have a solid budget to reference when comparing homes.
How do I estimate an affordable property price?
Once you have an idea of how much you can afford monthly, you’re on step closer to knowing the properties you should focus on. Tapping the experience of a real estate professional, like an agent or broker, can further help you narrow down a realistic price range.
Most online real estate sites include mortgage loan calculators that adjust your potential monthly loan repayment based on a property’s price, how much you’re putting down, the rates and terms you can reasonably expect and taxes.
How can a first-time homebuyer prepare for homeownership?
One way to prepare yourself for becoming a homeowner is to manage your finances as if you’re repaying the proposed loan amount you’ve determined based on your salary for at least six months before you buy a house.
If you’re paying less in rent today than you’d pay for a mortgage, insurance and upkeep on your new home, put the difference aside in a savings account for those six months. The extra money will prove to you — and future mortgage lenders — that a mortgage won’t be a hardship on your finances.
When looking for a home, know the average monthly payment you can afford to focus on just those properties that meet your lifestyle and budget, rather than those beyond your financial means. Live for a few months as if you’ve already taken on a loan to determine whether today’s choice will be a good fit in the long run.