[Image: Picture of House]Wanting to purchase a home, knowing what type of home you would like to purchase and having your finances in order are all steps you must take in order to reach home ownership. There are more factors that must be considered and worked through as well. Knowing the price limit on what you can afford is very important.
Five Factors used to determine your housing price limit are: loan type, income, debts, savings and credit history.
- Loan Type (conventional, adjustable-rate, etc.) Qualifying guidelines and down payment requirements vary by type of loan and lender.
- Your Income (or household income if purchasing jointly)
The maximum amount of your income that may be spent on your house note is set by the lender or the mortgage instrument. This is calculated to see how large a loan you may qualify for. Keep in mind that qualifying for a certain loan amount does not always mean you can afford it. It may be helpful to estimate monthly payments and affordability before you comparison shop.
Lenders use two ways to estimate the maximum amount you can spend on all housing expenses. This is usually determined by two income ratios; front-end ratio or back-end ratio. If a front-end ratio is used, your total monthly housing expense [principal, interest, taxes, insurance,(PITI)] cannot exceed 25-29% of your stable monthl[Image: Green Dollar Bills]y income.
3. Your Debts
Your debts include such items as; house payment, credit cards, car payments, and other loans. Lenders using a back-end ratio require that monthly debt payments not exceed 33 – 41% of monthly gross income.
- Your Savings
Your savings will be needed to use as a down payment in order to qualify for a loan. Down payments typically range from 0-20% of home price and vary by lender and type of loan. You will also need cash reserves (savings) for miscellaneous fees and charges at closing (varies from 2-10% of the mortgage loan amount).
- Your Credit History
A credit report is a record of your history of credit card debt and other loan repayments. It shows how much debt you have and if you pay on or before the due date. Information in your credit report is used to determine your credit score, which is used by creditors to make decisions about whether to give you a loan and the interest rate they will charge. An advantage of credit scoring is that it avoids discrimination.