Buying a Home without Going in Over Your Head
Buying a home is one of the biggest expenses of anyone’s life, and because of that, should be entered into with extreme caution. Buying too big of a home can lead to foreclosure and bad credit, while buying too little could lead to a quick move, which could cause you to lose money on the deal when upgrading.
On the other hand, buying at the wrong time, such as when you have bad credit, could mean that you’ll pay several hundred dollars more per month than you would with good credit.
So what do you do in order to assure that you buy as much as you can afford, but no more? Well, the best way to get started is to talk to a bank representative and ask about a pre-qualification. They will ask you about your current income, how much money you owe to creditors, and how much you pay for monthly bills. They’ll then ask you how much money you have to put down for a down payment. From there, they can use a mortgage calculator to estimate how much home you can afford.
Typically, banks will give you a number based on monthly income, but only after weighing how much debt you have. A conservative estimate is that your monthly mortgage payment should be no more than 30% of your monthly income. Keep in mind though that if most of your income is tied up in long-term debt, than they will base it not on your income, but net income. In this case, it’s a great idea to pay down as much debt as you can prior to getting a home loan. With interest rates as low as they are, your money is far better served paying off high interest debt than being used as a down payment on a home loan.
The difference between a credit card balance, at something like 19%, and a home loan, at 4%, is monumental.
As to how much you should put down, it really depends on your cash situation. It’s best to keep a 3-6 month reserve fund in savings, in case you lose your job or face an emergency. However, if you are approved for a $200k home loan, paying $20k down would allow you to buy a $220k home. On the other hand, it would push you from having 10% down to around 9%, which isn’t a huge difference, but might push your interest rate higher. These are all of the things to consider when trying to decide how much to buy.
If you want to play with the numbers a bit and see how much you’ll need to put down in order to qualify for that dream home, then check out our free mortgage calculator & mortgage quotes tool. You can use this to test varying down payments, interest rates, and home value amounts to see how it affects your monthly payment. You can then compare that to our free mortgage quotes utility, which will give you five free quotes from local lenders that you can use to see what interest rate you qualify for. From there, you’ll know exactly how to manipulate the numbers to your advantage.