Steps to Determine How Much House You Can Afford to Buy
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Do you know how much house you can afford to buy? Smart home buyers do their homework before starting an online search for homes for sale in North Carolina. By taking a few minutes to come up with an estimate of the homes you can afford to buy, you will save yourself hours of wasted time and energy falling in love with Chapel Hill, Durham and Raleigh homes that are out of your price range.
Ballpark Figure Based on Your Income
Let’s look at a couple of qualification ratios lenders use to determine how much money they will lend to a borrower and use those to help you get an estimate of how much house you can afford to buy. First, your maximum monthly mortgage payment should not be more than 28% of your income before taxes are taken out (gross monthly income). Next, your total housing payments (mortgage, insurance, taxes, HOA, PMI) should not exceed 32% of your gross monthly income.
Armed with those qualification ratios, you can get out your calculator and start determining how much you can pay to buy a house in North Carolina. Also, keep in mind that lenders also look at the debt-to-income ratio and generally do not like to see anything exceeding 40% of your gross monthly income. So, before you go to see a lender for a mortgage quote, start paying down your debt.
How Much Do You Have for a Down Payment?
Have you planned ahead and saved for a down payment on your home purchase? Typically, lenders require 20% or higher for a conventional loan down payment. That number, however, is not set in stone. If you want to make a smaller down payment amount on a conventional loan, you may be required to pay for private mortgage insurance (PMI), which provides additional protection for the lender in case the homeowner defaults on the loan. And don’t forget, you will need to set aside money for closing costs as well.
Use an Online Mortgage Calculator
A quick and easy way to determine what you can afford to buy is to use a free online mortgage calculator. While these calculators are no substitute for sitting down with a lender, they are convenient, free and a good starting point for home buyers. Many online mortgage calculators will not only allow you to calculate your monthly payments but also display an amortization schedule for the term of the loan.
Mortgage Pre-Qualification and Mortgage Pre-Approval
Buyers who are interested in discovering the price range of homes they can afford should consider getting a mortgage pre-qualification or a mortgage pre-approval. Remember, these two home-buying tools are not interchangeable. First-time home buyers, or individuals who have never borrowed money from a lender to purchase a home, commonly make the mistake of assuming that these two different processes are one in the same.
A mortgage pre-qualification involves a lender looking at a potential borrower’s overall financial situation (income, debts, assets, etc.) and providing a preliminary estimate of what loan terms that borrower may qualify for at that time. These are usually provided at no cost. A lender does not pull your credit, and you will have a general idea of the price range of homes you can afford.
With a mortgage pre-approval, which looks at your creditworthiness and delves into financial details, you will find out if you qualify for a mortgage. It will also specify the amount of financing, the potential interest rate, and an estimated monthly payment. In other words, you will receive a more comprehensive idea of exactly what you can afford to buy.
One thing to keep in mind is not to become discouraged if you don’t have perfect credit or a significant amount of money to use for a down payment. Lenders have access to a wide-variety of mortgage types and programs which can help make owning a home more affordable. When you get serious about buying a new home in North Carolina, talk to lenders to see what is available to assist you.
Ready to start your search for homes for sale in Raleigh, Chapel Hill, and Durham? Contact Red Door Company, and we will help you search North Carolina homes for sale and find the perfect home that fits your needs and budget.