Affording a house is no mean feat. Before you commit to something as huge as a mortgage, you'll need to take stock of your financial situation. Lenders are going to want to see proof of income, as well as your debts and assets, before giving you a mortgage number, so get your financial ducks in a row before shopping for a pre-approval letter.
Debt to Income Ratio
Mortgage lenders want to know that you can pay your mortgage on time, every month. They'll take a look at your monthly income along with payments that you make on your other debts, then let you know how much house you can afford. The better your credit record, the more liberal the ratio. Lenders generally don't want you to spend more than 28 percent of your combined gross monthly incomes on your monthly mortgage payment, or more than 44 percent of your income on all your debt payments combined. Different lenders have different standards, though, so it pays to shop around.
If either of you have credit problems, many lenders either won't give you a mortgage or will require a hefty down payment and charge you a higher interest rate. To get a mortgage at a decent rate, and without the huge down payment, you'll have to do one of two things: First, you can take some time to clean up your credit. Many lenders pay the most attention to the last two years of your credit history when evaluating your mortgage application. The second option works for couples in which one person has a clean credit record. The person with the good credit history applies for the mortgage on her own. The catch is that she can only use her income to qualify for the mortgage.
Low-to-Moderate Income Programs
There are some home ownership programs, such as the United States Department of Agriculture's world development mortgage program, that specifically help people with low to moderate incomes buy a home. If you don't think you make enough money to buy a home, contact a United States Department of Housing and Urban Development (HUD) housing counselor to learn about your options.
Lower Your Debt
To get the home you want, find ways to lower your overall debt. For example, it might be wiser to temporarily forgo home ownership and put all of your extra income into paying down other debts or saving up a higher down payment. Another option is to buy an energy efficient home: If your home meets the International Energy Conservation Code (IECC) of 2000, your lender may grant you more leeway in your debt-to-income ratio.
Debt to income ratios are a guideline, not a hard and fast rule. Be cautious about buying “as much house as you can afford” if you have special circumstances that may threaten your income or demand financial resources in the future. For example, if one of you works in an industry that experiences fluctuation, taking out a smaller mortgage is a prudent choice. Similarly, if one or both of you has a medical problem, making sure that you have savings and maintaining good cash flow is crucial. Choose a smaller, less expensive house now and save yourself headaches in the future.
- U.S. Department of Housing and Urban Development: Energy Efficient Mortgage Home Owner Guide
- Trulia: Understanding the Debt-to-Income Ratio to Qualify for FHA Loans
- BankRate: How Much House Can You Buy?
- Nolo: Qualifying for a Mortgage
- U.S. Department of Veterans Affairs: Overview of the VA Home Loan Program
- U.S. Department of Agriculture: Single Family Housing Loans and Grants