Before you hit the streets, you need to do a little planning. We call it "pre-qualifying", or determining how much house you can afford to buy. Knowing your affordable price range will bring your house-hunting into focus. Many lenders will pre-approve you for a mortgage with minimal information from you, allowing you the opportunity to negotiate as a cash buyer.
How much house you can afford to buy depends on two things: how much you can afford for the monthly housing payment, and how much you can invest in the down payment. Monthly payments include principal and interest on the mortgage loan, and property taxes and insurance against fire and other hazards. These four costs are often abbreviated "P.I.T.I.". For some buyers and lenders, monthly housing costs may also include homeowners association dues, condominium fees, and mortgage insurance.
In todays market, an "affordable" home is not so much determined by sales price as it is by the financing which translates that price into a monthly payment. A house hunters first step is to set a housing budget, then go shopping for the house (price) and payments (P.I.T.I.) that fit that budget.
Even though there are many ways to qualify to buy a home, make sure the monthly payment makes sense for you. How large a payment you qualify for will depend upon a variety of factors. These factors include credit history, size of down payment, and length of employment. Everyones circumstances are different.
How much house can I afford?
The key items are the size of the down payment, interest rate, any monthly property fees, and the amount of the mortgage. The down payment might be zero in the case of VA-backed mortgages. A down payment of 20% or more on a conventional loan will eliminate the need for mortgage insurance. Miguel Avila can be very helpful to you in determining just how much house you can afford.
Sources for your down payment
One source of money for your down payment is your savings or the proceeds from the sale of a home you already own. But there are other sources. For example, parents have taken some new twists for first-time buyers.
Home Equity Loan - Parents often have considerable equity built up in their own homes and many are tapping that asset through home equity loans to make a gift to their children. Ask your tax advisor for current information. Often lenders will require a "gift letter" to verify that parents do not expect repayment.
Shared Equity/Profit-Sharing - In return for providing a part of the down payment, the parents (or another investor) share in the "profit" or net equity of the house when the homeowners eventually sell it.
Life Insurance - If you have built up a cash value on your life insurance policy over the years, you may be able to borrow from your insurance company up to the amount of this accumulated cash value. Often, they will even ask a more favorable interest rate than would be asked for other types of loans.
Stocks and Bonds - If you feel the market does not favor selling your stocks or bonds now, you may be able to secure a bank loan using your portfolio as security.
Company Profit Sharing or Savings Plan - Look into the possibility of withdrawing what you have in your profit sharing or savings plan account or borrowing against it, if your company has these programs.
Mortgage Insurance can reduce down payment
If you obtain a conventional loan, you may make a down payment of 5% or less. Through the lender, you will be required to buy private mortgage insurance (PMI). This insurance provides protection for the lender in case of default, allowing the lender to approve a larger loan amount.
Remember that in addition to your down payment and monthly payments, you will need money to pay for closing costs, moving, appliances, household setup, a reserve for family emergencies, and other miscellaneous items. So do not plan to put your last penny down on the closing table.
More mortgage help
New types of mortgages exist featuring help for first-time buyers and flexible terms for current home owners. These help home buyers to "afford more house" and to buy sooner by expanding qualification criteria.
Next go to What to look for to show what to evaluate.