It’s safe to say that 2020 was a year no one will forget. The year provided plenty of challenges and changes for individuals, families and businesses alike. Many are looking toward 2021 with hope for a promising year filled with new beginnings. If you find yourself adding “become a homeowner” to your resolution list for the coming year, it’s important to have a plan to make your resolution a reality.
Though it’s thrilling to gain the title of homeowner, it’s critical to understand the financial realities that come with this exciting, newfound responsibility. A mortgage catapults your finances into an entirely new realm and it’s important to grasp how it’ll impact your overall budget.
Qualifying for a Mortgage
The one factor a loan officer will check during the qualification process is your debt-to-income ratio. Once you provide the necessary documents, your loan officer will look at your monthly income versus your monthly debt. Your debt-to-income ratio is calculated by adding up your monthly debt payments and dividing that number by your gross monthly income.
Here’s an example from the Consumer Financial Protection Bureau*:
If you pay $1,500 a month for your rent, and another $100 a month for an auto loan and $400 a month for the rest of your debts, your monthly debt payments are $2000. ($1,500 + $100 + $400 = $2,000.) If your gross monthly income is $6,000, then your debt-to-income ratio is 33%. ($2000 is 33% of $6,000.)
A high debt-to-income ratio suggests concerns making a monthly mortgage payment and may lead to problems repaying the loan. Any number below the standard 43% is generally considered acceptable when qualifying for a mortgage.
Understanding How Much Home You Can Afford
Now that you have a better understanding of what a loan officer will look at, you’re probably wondering what you can realistically afford. The biggest element in determining what is obtainable will be the down payment you’re able to initially put down. Traditionally, 20% of the home’s asking price is standard – anything above the 20% benchmark almost guarantees a better rate or term. On the other hand, anything below 20% may require additional mortgage insurance to protect against potential default. However, don’t worry if you don’t have 20% to put down – PrimeLending offers a wide range of loan options that require low to no down payment.
Loans for First-Time Home Buyers
Becoming a first-time home buyer is an important milestone, that’s why we work to find the right home loan to fit your needs. As you begin your research into the process into becoming a homeowner, it’s important to learn more about the most popular loan types based on their benefits and affordability for first time home buyers. Check out our blog with more info on the best loans for first-time home buyers here.
Get Started Today