When you figure out how high a mortgage you can afford, concentrate on what you really need in a loan. Taking on long-term debt is what gets you into a home, but it also might cause you to lose it when unexpected expenses arise. Take time to understand the terms and conditions of your particular mortgage before you sign, so you will not ask your self, "How did I get here?" a few years down the road.
Figuring out mortgage affordability is a numbers game. You add up all your current debts, including credit card payments, and add your proposed housing costs. Housing costs include mortgage principal and interest, as well as homeowners insurance and real estate taxes. Your total gross monthly income divided by your total debt yields your debt-to-income ratio. Lenders prefer debt percentages under 36 percent. Government-backed loans from the Federal Housing Authority and other agencies accept debt percentages up to 43 percent, if you meet the requirements.
Get confirmation of your figures by prequalifying for the loan amount you want. Unlike loan approval, prequalification is nonbinding. You do not commit yourself to a loan, nor does the lender commit to providing the loan. It is an informal acknowledgment that your financial status qualifies you to obtain a loan for that amount, if you meet other important requirements. Before lenders give you money, they check your credit scores, and assess the market value of the property.
Putting 20 percent down on a home purchase gets you better loan terms and potentially a larger loan itself. When you provide funds for a larger percentage of the home, lenders feel more confident that you will pay back the loan consistently and on time, in part because you have more at stake financially. You eliminate mortgage insurance fees when you put 20 percent down on a home, making the loan cheaper and increasing the amount you can borrow. High redit scores also improve your odds of getting premium fixed-rate loans for the least cost possible. Lenders offer you lower interest-rates when you have high credit scores, again, saving you money.
Buying a house turns you into a shopping machine. Before moving into a three-bedroom house, you likely never thought about needing extra beds and sheet sets, not to mention window coverings, rugs and places to sit. When you push your financial envelope to get the highest mortgage you can afford, you run the risk of limiting your financial freedom. Buying slightly under your budget leaves wiggle room for vacations, car purchases and the other things that you might need to buy.
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