Where Are You Now? (Part 3): What Can I Afford?

Figuring out what you can afford before beginning the home search can prevent a lot of heartache and confusion down the road. To ease this process, lenders have a tried-and-true method they use to figure out your target house price should be by looking at the information you give them. Here are several things the lender will look at before determining your mortgage payment and the value of your house:

1. Credit history:

As we mentioned in a previous post, banks want to make sure you have a solid repayment history. The better your credit history and score, the better loans become available. For more information, visit our previous post on credit history and scores.

2. Income:

When looking at this, banks want to see that you have a steady income; ideally one that you have had for a long period of time. This doesn’t necessarily mean that if you have recently changed jobs that the bank will not understand, it just makes it a bit more difficult. As expected, if you are self-employed, they will want to dig deep to make sure you have a steady income. They do all this to make sure that your mortgage payment as a percent of your gross pre-tax income doesn’t exceed their limits.

3. Total debt load:

Banks are also going to look at your total debt load including car payments, credit card debt, college debt and other secured loans. From this, they will predict your interest rate, calculate the mortgage that fits your income, and then calculate the house price that fits this mortgage. That is their recommended maximum of the mortgage you can afford, and that gives us, as realtors, helpful information to help you find a great house for you to close on and enjoy.

There are some lenders who can do this entire process online, and others with brokers that can meet with you in person. Regardless of which method, your lender may provide you with a prequalification letter which is an informal expectation of what you can borrow, or a preapproval letter which is guaranteed in writing to grant you your loan once you provide the necessary documentation to back up what you have told them. It is very good to have these before home-buying, as this is part of the offer you’ll make on the house and proof you can afford the house you are making an offer on.

If you would like any extra information on local or online lenders, give me a call at (864)804-9210 or shoot me an email at chrisbyrd.c21@gmail.com