With interest rates low, home buyers are looking to purchase today. Whether it is your first home or you are looking to upsize, there are a few things to consider when you are trying to determine how much house you can afford. Here are three things to focus on when you are figuring out your personal finance situation as it relates to home buying.
Mortgage Payment, Overall Debt and Your Current Income
As a general principle, your mortgage payment should be no more than 28% of your income. To help figure out your total payments, you need to take into consideration more than just your mortgage. Think about how much your property taxes and homeowners insurance will be too. Other things to consider would be homeowners association fees and private mortgage insurance (PMI) if you're planning on contributing less than a 20% down payment.
The next thing to consider is how much additional debt you have accrued. This includes debt like credit cards, student loans and car payments. The total of this debt, along with the home payments, should be no more than 36% of your total income. While most loans stay within these guidelines, there are some loans that may go as higher for first time home buyers.
Your Credit Score Matters
Your credit score, the rating that FICO gives everyone based on their ability to pay off debts, your credit history and how much credit you are currently using, influences your interest rate. To help boost your credit rating, consider paying off some of that debt in a lump sum payment and limit your credit card use. Another tactic is to cancel credit cards that you are not using like store or gas cards. These types of actions signal to creditors that you are serious about paying off your debt.
For those first time home buyers with credit concerns, if your credit score is at least 500, you may qualify for an Federal Housing Administration (FHA) loan. The down payment on an FHA loan can be anywhere between 3.5% and 10%. You will be required to carry PMI and the interest rates may be a little higher. Remember, the better your credit score, the better the interest rate.
The Type of Mortgage Impacts Your Overall Payments
When it comes to loans, many people have heard about the 30-year fixed mortgage loan. This type of loan provides an interest rate that remains constant over the 30 year repayment period and generally requires a 20% down payment but did you know there are other kinds of loans out there? If you are a first time home buyer and looking for a starter home or upsizing your home into one that you are planning to be in for less than 3, 5, 7 or even 10 years, you may want to consider an adjustable rate mortgage. This type of mortgage usually offers lower interest rates for the first 3, 5, 7 or 10 years and lower down payment requirements, at least 5%, before the rate adjusts to the current market standards. For those looking to sell their home after the introductory period, this option may be more attainable. Keep in mind that once the initial 3, 5, 7 or 10 year period ends, rates will change.
As you start the home buying process, contact a loan officer at First Savings Mortgage. Loan officers help you with the pre-approval process and determine what type of loan fits your personal needs and budget. This makes the home buying process much smoother. Once you know how much home you can truly afford, you can really begin to focus your search.