3 Questions to Answer Before Buying a Home
1. How is Your Credit Score?
One of the most important factors in getting that favorable interest rate on a mortgage is your credit score. Your credit score is essentially a standardized way for lenders to determine how risky it is to lend you money. In order to get the most favorable rate on your mortgage, you will want to have the best credit score possible. Your credit score is formally known as a Fair Isaac Corporation Score (FICO® score). Many factors are taken into consideration such as your payment history, the amount of money owed, and the length of your credit history. There are lenders who offer a suite of products for customers who are looking for a fresh start.
2. Can You Qualify for a Mortgage?
When it comes to getting prequalified, another factor to consider is your debt-to-income ratio. If a loan program uses a 28/36 qualifying ratio, it means you are allowed to spend no more than 28% of your gross income on monthly mortgage payments and no more than 36% on total debt. This includes debts such as car and school loans, credit cards, child support, and alimony. So if you earn $60,000 per year, your monthly gross income is $5,000. Under the 28/36 guidelines, your maximum monthly mortgage payment should not exceed $1,400, while your totally monthly debt should not exceed $1,800.
3. How Much Home Can You Afford?
If you have a larger down payment, you may be able to buy more home and still fit in the debt-to-income ratio. If not, you may need to look at a home that has a lower purchase price. Down payments are generally paid in cash, due at closing, and based on a percentage of the selling price of the home. You can make a down payment of 20% or more and avoid the cost of mortgage insurance.*
*This summary is based on a $125,000 loan amount, loan term of 360 months, an interest rate of 4.25%, and annual percentage rate of 4.5828%.