How many houses can I afford? Debt, FICO tax insurance play a role


The price of a home can be intimidating, especially for first-time home buyers.

The national median listing price set a record high of $ 310,000 in April, according to At the same time, most first-time buyers are looking for a home for $ 150,000 or less, according to a recent survey from LendingTree.

This kind of discrepancy could send many potential buyers back into the rental market, afraid they won’t be able to buy a home.

But there are many factors within your control that can help you afford a home purchase. Some may require advanced preparation, such as saving and improving your creditworthiness.

In other cases, you just need to be open to more mortgage and home options.

Here are some ways to buy your new home.

Find a deposit

The more you contribute towards the purchase of your home, the lower your monthly mortgage payment will be. If you are able to shell out 20% of the purchase price, you will also avoid private mortgage insurance which can increase the monthly cost.

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Before you start your home search, add up what you have for a down payment, including a job bonus, your tax refund, your savings, and family gifts. If you don’t have a lot – or even nothing – for a down payment, all is not lost. Some homebuyers may benefit from zero or low down payment options from the Veterans Administration, Department of Agriculture, and more.

Reduce your DTI

Another key factor in qualifying for a mortgage – and paying off your home is the debt-to-income ratio (DTI). Lenders add up your monthly debt payments, including your future mortgage payment, and calculate how much that is your monthly gross income.

The higher the ratio, the more risky the borrower. If your DTI is too high, you might not qualify at all. Each lender sets their own DTI requirements. If your DTI is getting close to the edge, you need to reduce your monthly debt. Refinance your auto loans and consolidate other debt to reduce monthly payments.

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When it comes to credit card debt, forget about the conventional wisdom of personal finance of paying off debt at the highest rates first. In this scenario, you want to pay off the debts with the lowest balances and highest monthly payments to immediately reduce your DTI.

“This allows you to get the best value for your money by increasing your borrowing power,” says Scott Sheldon, branch manager for New American Funding in California.

Before buying a home, it’s worth working on improving your credit score before the big purchase. Why? Because it translates into savings.

First, lenders grant lower mortgage rates to borrowers with higher credit scores. This means that you will pay less interest over the life of the loan and your monthly payment will be lower.

For example, if you have a credit score of 760 or higher, you are entitled to a rate of 3.86% on a fixed rate mortgage of $ 216,000 over 30 years, according to FICO. That’s a mortgage payment of $ 1,014. But if your score is 650, then your rate goes up to 4.9% with a monthly payment of $ 1,147.

Likewise, your credit score affects the premium you pay for private mortgage insurance, or PMI, which is required if you pay less than 20% of the purchase price.

For example, on a $ 250,000 house with 10% down payment, the monthly PMI payment would be $ 71.25 if your credit score is 750. But if your score is 650, the PMI payment is almost $ 100 more to $ 170.63 per month, according to John. Stearns, senior mortgage originator at American Fidelity Mortgage in Wisconsin.

“If you have bad credit, you’re dead in the water,” Stearns says.

The fastest way to improve your credit score: Set up automatic bill payments so you’re never late. Reduce or eliminate your credit card balances to 30% or less of lines of credit. And get rid of any mistakes on your credit report.

Discover all the loans

Don’t focus on one particular mortgage program. Instead, learn about all of your options from a professional mortgage advisor before you even begin your search. In fact, it might not be a bad idea to know that you qualify for more than one mortgage when shopping, Sheldon says.

Adjust expectations

The home you can afford might not be the one that ticks all the boxes, especially if you’re a first-time buyer in a market with limited entry-level homes. It is wise to prioritize your absolute must-haves from your desires.

Other quick tips

Interest rate: Another way to lower your mortgage rate – and lower your monthly payments – is to lower the rate, says Pava Leyrer, COO of Northern Mortgage in Michigan. You can make a permanent buyback, where the lower interest rate lasts for the life of the loan.

Or, you can make a temporary buyback where the lower rates last a few years. Both require upfront payments at close. In some cases, the seller will pay for the buyback as a concession.

PMI: You can also eliminate the monthly PMI premium by prepaying mortgage insurance. Prepayment can be financed in the loan but results in a lower monthly payment than a monthly PMI.

Insurance and taxes: What you pay in taxes and insurance can differ by zip code and county, so a one-street house can make a big difference in your monthly payment. Compare online insurance rates and local property taxes. When budgeting, bet these costs will increase in the future, Leyrer says.


About Nereida Nystrom

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