You’re in the market to buy a home, which is a very exciting time. But if you’re new to the process, you probably have a number of questions, including how to determine the price range you can afford for monthly payments.
Michele Radosevich, Senior Loan Consultant with MTH Mortgage, which provides home loans to homebuyers, says while it’s a good idea to go through a pre-qualification process with a lender, it’s also important to do your homework beforehand.
Figure out your income.
Lenders take a look at your gross income (before taxes) when approving you for a loan. “You’d be surprised at how few people know how much they actually make,” says Radosevich. The best way to figure out your gross income is to review your W-2s or tax returns from the last two years. You should also check your paystubs from the last 30 days to see if your pay structure or amount has changed. “Really lay out what you make and what category that falls into,” says Radosevich. You need to consider whether you’re salaried or hourly, or if you receive bonuses, overtime or commissions. Being aware of your income can help you implement a fixed budget of your yearly earnings and better understand exactly how much home you can actually afford. These factors will also help determine your approval process for your loan.
Assess your debt.
When purchasing a home, calculating your debt-to-income ratio (how much of your monthly gross income goes toward paying debts) is an important step to determine how much you can afford, says Radosevich. “You should try to keep that percentage around 30% or lower. The lower, the better,” she advises.
There are two calculations to keep in mind:
Lenders will take a look at your monthly debt (the items listed in your credit report) when deciding whether to approve you for a loan. When you sit down and determine these payment amounts, Radosevich also recommends you calculate other monthly expenses and spending habits. These include food, gas, entertainment, health care bills and utilities. Although lenders don’t take these items into consideration, it’s important that you consider them when evaluating how much of a monthly house payment you can afford.
Save money for the down payment and closing costs.
During the beginning stages of your home search, Radosevich advises that you establish a budget based on your gross income to help ensure you have extra funds saved. This will help you be prepared for costs such as varying down payments and closing costs. Down payment amounts vary, depending on what kind of loan you get. The golden rule of 20% down is not absolute and could even be considered a myth, and some buyers, depending on the loan, can put as low as 3% down.
Another option includes a 401(k) loan, depending on what type of 401(k) you have. However, you should consult with a financial advisor and employer first to see if this is the best avenue to take.
As for closing costs, many new-construction companies, such as Meritage Homes, will cover a portion or all of the costs. However, closing costs such as title insurance, processing fees, and taxes can vary, and it is recommended you check with your homebuilder to learn how they can help depending on your specific situation. If you’re purchasing an existing home, you may be able to negotiate those costs with the seller. But Radosevich says to still calculate closing costs into your budget.
This calculator and any related information are provided solely for general information purposes. Although the calculator may be a useful tool in evaluating certain financial information and assumptions provided by the user (all inputs, including any amounts provided as starting assumptions, are subject to user input/adjustment), it is not intended in any way as financial, securities, insurance, tax, or legal advice or services, and in no event should it be construed as a commitment to lend. Further, this calculator and any related information may not include all financial information relevant to any particular user/home financing transaction, loan programs and rates are subject to change and may not be available to any particular borrower or home financing transaction, and there often are other important considerations to any home buying / financing decision. Accordingly, this calculator and any related information are provided on an "AS IS" AND "AS AVAILABLE" BASIS WITHOUT REPRESENTATIONS OR WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, WARRANTIES OF SUITABILITY, MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, AND NON-INFRINGEMENT. Meritage Homes does not assume any duty by making this calculator or any related information available, all of which duties are expressly disclaimed, and Meritage Homes shall not be responsible for any errors or omissions therein or the consequences of any decisions or actions taken in reliance thereon. Potential homebuyers / borrowers that desire information or guidance tailored to their specific situation should contact a relevant professional.
Check your credit score.
Make sure you’re regularly checking your credit score to help you be more aware of your credit situation as well as detect any inaccurate information. Your credit score will help lenders accurately pinpoint your credit worthiness and the interest rates they may offer. If your credit score is less than perfect, there are programs (such as the MTH Mortgage Financial Solutions Program) that can help. And while it’s a good idea to track your credit score online to see how it’s trending, that number will be a little different than the one your lender will obtain, because creditors and lenders use more specific industry credit scores customized for the type of credit product you’re applying for. “All the online consumer scores are raw data not analyzed for a mortgage score,” says Radosevich. “Know your credit score going in so when we pull your mortgage score, you’re not shocked.” If the difference is big enough to put you into a lower credit tier, for instance from Credit Tier A (700-739) to Credit Tier B (660-699), you could end up with a higher interest rate.
As you go through the process of trying to determine how much house you can afford, “it’s important that you don’t disqualify yourself,” says Brian Hall, President of Financial Services at Meritage Homes. “You should talk to a loan consultant from a reputable lender to get a better idea of what programs may be available to you and how much home you can afford.” If you're not quite ready financially to buy a home, don't get discouraged. There are ways to get financially ready buy a home if you know what needs to be done. There are several online tools that can help you, such as the All-in Payment Calculator. MTH Mortgage aims to assist and provide the solutions to ensure you're well informed through the mortgage application process. You may even apply* now to find out if you’re pre-approved and discuss your options with a loan consultant.
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* By clicking this link you will be leaving the web site of Meritage Homes and entering the site of MTH Mortgage, LLC. The link is being provided for your convenience and no information contained in the linked site has been endorsed or approved by Meritage Homes and Meritage Homes is not responsible for the content of such site. “Pre-Approval” provided by MTH Mortgage, LLC, an Arizona limited liability company (“MTH Mortgage”), and is subject to the terms and conditions imposed by MTH Mortgage. Any financing arrangement and relationship shall be solely between Buyer and Buyer’s Lender (whether or not Buyer has selected MTH Mortgage), and in no event shall Meritage Homes have any responsibility, obligation, or liability for any “Pre-Approval” provided by MTH Mortgage or any other lender, nor for any other matters or disputes that arise in connection with Buyer’s financing arrangement with Buyer’s Lender. All costs and expenses associated with Buyer’s financing arrangement shall be Buyer’s responsibility and shall be payable by Buyer in addition to any closing costs payable by Buyer pursuant to its contract with Meritage Homes for a home. Meritage hereby notifies you that Meritage has a business relationship with MTH Mortgage, LLC, an Arizona limited liability company (“MTH Mortgage”). Specifically, Meritage or one of its affiliates is a member of and owns a sixty-five percent (65%) ownership interest in MTH Mortgage. As a result of this relationship, Meritage’s referral of MTH Mortgage may provide Meritage with a financial or other benefit.