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How Much House Can I Afford?

Here are the factors that will influence the amount of money you can afford to borrow for a home mortgage: Income, credit history, the size of your down payment, your employment and residence history. This MORTGAGE CALCULATOR will give you simple advice on how much you can afford to pay for a house.

Remember that affording a new home involves more than just the amount you borrow. Be sure to also consider the up-front costs of buying a home as well as the ongoing costs of home ownership.

What Are The Upfront Costs When I Buy A Home?

Mortgage Application Fees
Mortgage application fees include “origination” (or “service”) fees. These can be flat fees, or the fees may based on 1% to 2% of the total purchase price. Also included are appraisal, underwriting and credit reporting fees, which can be built into your closing costs.

Earnest Money
Earnest money is a deposit that you, as the prospective buyer, will put down when you make an offer on a home. As the word “earnest” implies, this deposit represents your serious intention to buy. If your bid is just one of multiple bids made on the home, the earnest money you put down (also known as a “good faith deposit”) may influence the seller’s decision-making in your favor. There are a few factors that can influence the amount of earnest money you decide to put down when you make an offer. Your real estate agent will help you determine the amount of earnest money you should put down in order to put you in the best position to win the bid.

Down Payment
Often you can get the best mortgage rate by paying a higher mortgage down payment. Down payments can range anywhere from 0% to 20% or more of the total cost of the home. Fifteen to 20% is ideal. Paying mortgage points up front can also help lower payments and interest rate on your home mortgage.

Mortgage Points
Mortgage points are a fee that is paid when you take out your home mortgage loan. They are essentially a form of pre-paid interest, paid up-front, in exchange for a lower interest rate and lower monthly payments. This practice is known as “buying down” your interest rate.

Each mortgage point represents 1% of the amount of the mortgage; so one point on a $130,000 mortgage represents $1,300; two points represent $2,600, and so on. You may be required to pay a number of points as an origination fee, as a closing cost, or as part of the down payment. However, some points are optional. Your realtor will guide you through the decisions you make regarding payment of mortgage points.

Typically, buying additional points is done to lower the rate on a fixed-rate mortgage. Buying points for an adjustable rate mortgage provides a discount on only the initial fixed period of the loan. For that reason, people don’t normally buy additional points for an adjustable rate mortgage.

When buying mortgage points, PAY ATTENTION TO THE NUMBERS. Because you are paying more up front, the reduced interest rate will save you money over the long term – but not over the short term. The longer you plan to live in your new home, the better the chance you will reach the “break-even” point, where the interest you have saved compensates for your initial cash outlay. If you have a shorter-term plan and have limited cash – or if you would benefit more from a bigger down payment, paying points may not give you the greatest benefit. Talk with your mortgage loan originator about whether buying points is the best option for you.

Closing Costs
Final closing costs typically range from 2% to 4% of the total loan amount. Some buyers are allowed to roll closing costs into their mortgage loan, allowing them to pay off these costs as the mortgage is paid down. Closing costs are all paid at once, and can include:
- Mortgage application fees (see above) Mortgage points (see above)
- Attorney fees
- Inspections and surveys
- Title insurance and title search Escrow deposit
- City recording fees

Home Ownership Expenses
Owning a home requires a financial commitment beyond your monthly mortgage payment. Make sure you’re taking all of these costs into account when figuring how much house you can afford. Prior to committing to a home mortgage, it is very important to have a good idea of all the costs involved in home ownership aside from your mortgage payment. Home ownership costs typically include:
- Mortgage insurance (required for most mortgages with down payments less than 20%)
- Home insurance
- Utilities
- Repairs
- Property taxes

Planning and Saving Tips
If you’re still saving for your first home, here are some tips and advice that can help:
- Saving for a higher down payment can mean a lower APR and lower monthly payments.
- Maintaining a regular and reliable income improves your standing with lenders.
- Combining stated income with a partner or spouse can give you an advantage.
- Consistently paying your bills on time contributes to a good credit score. Limiting your monthly debt also helps improve your credit score.
- Remember that generally, your mortgage payments should represent less than 28% or your income.

Building sound finances and a rock-solid credit rating before you buy will help you afford more home. This can also help you compete more effectively for the house you want; make it easier to handle the up-front costs of buying a home; and make home ownership more fun and easier to manage.

Is It Better To Buy Or Rent?

Here are some of the advantages of owning a home:
- Your monthly house payments build equity and lead toward home ownership.
- With a fixed-rate mortgage, your monthly payments will remain the same for the life of your loan.
- Your mortgage interest may be tax-deductible. Property taxes and mortgage points may also be deductible; consult your tax advisor. (See Mortgage Points in “Mortgage Application Fees” section above.)
- If your home increases in value, you can make a profit when you sell. A home can be passed on to children or other family members.
- Home equity (the amount of loan principal you have paid off) can be borrowed against to finance educational expenses, home-improvement projects, small-business startup costs or other needs.
- You can make changes or home improvements as you wish.
- A landlord can’t decide to sell your house and force you to move.
- Seeing how much house you can afford is a good first step toward making the decision on whether to rent or buy.

What Are The Different Types Of Mortgage Loans?

Understanding your loan options is an important part of making the best decision for your personal situation. Here is a quick rundown of the different types of loans, their key benefits, and how to determine which loan may be best for your personal circumstances:

Conventional Fixed- Rate - The lowest fixed interest for eligible buyers.
Adjustable-Rate (ARM) - The lowest rate for first 3-10 years of loan for eligible buyers.
FHA - Federal Housing Authority. Backed loans with flexible guidelines.
VA - Veterans Administration. Backed loans for military members.
RD - Rural Development
USDA - United States Department Of Agriculture

Loans granted by the FHA (Federal Housing Authority), VA (Veterans Administration) and USDA (United States Department of Agriculture) are designed to meet special circumstances or provide specific benefits. Click links to learn more.

What's The Difference Between Prequalification and Pre-approval?

Mortgage Prequalificaiton: A Smart Way To Start
Mortgage prequalification is a simple assessment of whether your debt-to- income (DRI) ratio fits guidelines for home loans. It also provides an estimate of how much you may be able to borrow – and that’s a good step in your home-buying journey.

While your DTI number is informative, keep in mind that you could qualify to borrow more than you can afford to spend on your house payments when factoring in your other living expenses and needs, such as furnishing your new home and monthly bills.

Getting prequalified does not require a commitment from you or the bank. Prequalification is not an actual loan application, and prequalification does not factor in your credit history. So even if you do pre-qualify, having an unfavorable credit history may prevent you from actually getting the mortgage loan. If you have concerns about your credit history, talk to your loan originator right away to find out what options may be available to you.

When you become prequalified, you may ask the realtor or loan originator who assisted you to provide a letter stating how much you may be able to borrow. Give this letter to your real estate agent to show you are serious about taking the steps to buy a home. You can seek prequalification online or by talking to a mortgage loan originator.

Pre-approval: Making It Official
Mortgage pre-approval involves the same steps as a mortgage application: You will provide detailed information about your income and assets, which will be reviewed by the lender’s underwriters. If approved, you’ll receive a commitment by the lender for a specific loan amount. When you apply for a mortgage, you are actually applying for credit to purchase a specific property.

Your pre-approval shows you have the resources to make the purchase, and it helps you act quickly when you find the right home. From the seller’s point of view, a pre-approved buyer is more attractive than prospective buyers who SAY they can get a loan, but have nothing to back up their offer. By proving you have the bank’s backing, your mortgage pre-approval can help you negotiate on price, and can serve as the deciding factor when sellers receive multiple bids.

A note on timing: Do not apply for a pre-approval until you are fairly certain you will make an offer on a home within the next 90 days. Unlike getting prequalified, a pre-approval involves requesting a copy of your credit history and examination of your application and other documents you provide. A pre-approval will show up as an inquiry on your credit report, and it is only good for a certain amount of time.

If you decide to proceed with the loan, you may also be required to pay an application fee and pre-pay for the home appraisal and other costs. An estimate of costs or fees to be paid at the mortgage closing will be determined at this stage of the process.

To get pre-approved, you’ll need to provide some personal information and financial documents including detailed proof of your income for the past two years. You can start your mortgage application by contacting a mortgage loan originator.

What Is A Down Payment?

A down payment is a portion of the cost of a home, paid up front. Generally, the more you put down, the lower your interest rate and monthly payment will be. Your interest rate can be lower with a good down payment because putting down more money takes some of the risk off the lender’s shoulders. When you do that, the lender can reciprocate by giving you better mortgage rates. Think of your down payment as an investment in your home and in your lending rate.

Getting the lowest mortgage rate typically requires a down payment that amounts to at least 20 percent of the home’s purchase price. However, it is not uncommon to purchase a home with a down payment of 15%, 10%, or even less. Some government-backed loans, such as FHA, USDA, RD and VA loans, are available to qualified home buyers with a down payment as little as 3.5% or no down payment. If you haven’t already, review the different types of loans here before attempting to make a decision on the type of loan that is best for you.

Here’s another good reason for making a higher down payment: The more you pay up front, the less you will owe on your mortgage, because the amount of your down payment is subtracted from the total cost of a house. And this translates to lower monthly payments, depending on the number of years your loan is based on. Use this calculator to estimate your monthly payments based on the amount you borrow.

What Documents Will I Need To Apply For A Mortgage Loan?

You can provide much of this information in person or on your application. At some point in the loan approval process, the lender may request other types of documents in addition to those stated here.

Mortgage Prequalification Checklist
Mortgage prequalification is an assessment of whether your debt-to-income (DTI) ratio fits mortgage guidelines. This assessment provides an estimate of the amount you may be able to borrow. You may also request a prequalification letter, which you can give to your real estate agent to show you are a serious home buyer. Prequalification is optional, but it’s a helpful step in the home-buying process. Here’s the information needed for prequalification:
- Full name
- Current address
- Estimated annual household income Estimated monthly household debt expenses

Mortgage Pre-approval Checklist
Even if you haven’t completed the prequalification process, you may apply for pre-approval at any time. The first step is to complete a full mortgage loan application, which will require the following information. This may not be a complete list. Your loan originator will inform you about any additional requirements.

Residential History
- Your residential address for the past two years
- Landlord names and addresses for the last two years, if you rented during that time

Employment and Income History
- Paycheck stubs from the last 30 days showing your year-to-date earnings
- W-2 or I-9 tax forms (issued by your employer) for the past two years

Personal Assets
- Bank account statements from the two most recent months for all checking and savings accounts
- Any other asset statements from the past two months for CDs, IRAs, stocks, bonds or other securities you intend to use for your down payment
- Current real estate holdings including property address, current market value, mortgage lender’s name and address, loan account number, balance and monthly payment

Personal Debt
- A list of any new monthly debts not listed on your credit report (auto loans, student loans, mortgage loans, credit cards, etc.), including creditor name, address, account number, - minimum monthly payment amount and outstanding balance on each account
- Additional documents may be required at your mortgage closing. Your real estate agent and mortgage loan originator will let you know which documents will be needed when you close on your new home, and they’ll work closely with you at each step of the mortgage process.

What Takes Place At The Mortgage Closing?

The closing takes place during a meeting that includes the buyer, the buyer’s agent, the seller, the seller’s agent, and a closing agent. The closing agent is either an attorney or a representative from the title company who manages the ownership paperwork.

Through the course of the closing, several documents are reviewed and signed. Once all of the costs due at closing have been paid and the paperwork has been signed, you can collect your keys and get ready to move into your new house.

What Are Closing Costs?
As part of your mortgage application you will receive a Good Faith Estimate (GFE) showing your potential closing costs. Some closing costs on a house can be rolled into the mortgage loan.

Who Pays The Closing Costs?
Both the buyer and seller usually take part in pay closing costs. However in certain situations the buyer may be able to negotiate an agreement in which the seller pays a larger portion, or all of the closing costs.
Closing costs can include:
An origination fee Discount point(s) An appraisal fee Credit report Title search Recording fees

How Much Are Closing Costs?
Closing costs typically amount to two to five percent of the purchase price but they can vary depending on your lender, location and property. Since closing costs depend on the purchase price, they are an important consideration when working with your real estate agent to decide how much to offer on a house.

As part of the mortgage application process you will receive a Good Faith Estimate (GFE) that indicates your potential closing costs. By law, an itemized list of closing costs must be provided to you within three business days of your mortgage application, and final closing costs should reasonably reflect the GFE. Your lender will also provide a HUD-1 settlement statement outlining your closing costs within a day of your closing.

How Long Does It Take To Close On A House?
Many factors go into determining how long the closing process is likely to take; it depends primarily on your lender. You should receive an estimated closing date on your purchase agreement. The type of mortgage loan can also impact how long it takes to close on a house. FHA loans often take a little longer than conventional loans. Make sure to check in with your real estate agent for regular updates on how the timeline is coming on the closing of your house.