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<\/a>How do lenders assess what you can pay back?<\/h2>\n
There are several considerations lenders take into account to determine what a borrower can afford, including credit score<\/a>, income and debt, down payment amount, and so on.<\/p>\n Using your credit report, pay stubs, tax returns, and other key financial inputs<\/a>, a lender will add up your total household income and your total household debt; this is referred to as your debt-to-income ratio, and is expressed as a percentage.<\/p>\n If your debt to income (DTI) ratio is too high, you will either not get approved for a very high amount, or you will be declined altogether until you pay down your debt. Per the Qualified Mortgage rule adopted in 2014, most lenders will require that your DTI be no higher than 43%<\/a>, although some products will allow that to go slightly higher.<\/p>\n Using reports from the three major credit bureaus: Transunion<\/a>, Experian<\/a>, and Equifax<\/a>, a lender will pull your credit score.<\/p>\n It\u2019s a good idea to stay on top of your score by subscribing to a credit monitoring service through one of these bureaus, so you\u2019re not shocked by the numbers when the lender pulls your report.<\/p>\n (In fact, you\u2019re entitled to a full credit report at no cost from each of the three nationwide credit reporting companies annually. You can order one online from annualcreditreport.com.)<\/p>\n You don\u2019t need a perfect credit score to buy a home, but if your credit score is too low, it can affect how much a lender will approve you for or if you will be approved at all. You may still qualify for FHA (Federal Housing Administration) loans with a credit score as low as 580, but you\u2019ll need to commit to at least a 10% down payment.<\/p>\n If you\u2019re stuck in the low 500s, however, or want to go the conventional loan route \u2014 you may need to do some credit score clean-up work before you\u2019ll qualify for a loan.<\/p>\n \u201cWhat we\u2019ll do in that situation is put the buyer through a credit repair program to try to get their score up,\u201d says top-selling Charlotte-based real estate agent Greg Martin<\/a>.<\/p>\n Check out HomeLight\u2019s guide to improving your credit score<\/a> as you gear up to buy a home featuring great tips on how to dispute credit report errors, settle outstanding debts, and pay down your balances.<\/p>\n The amount of money you\u2019re able to put down<\/a> not only informs whether or not you will be approved for a loan, it also determines the type of loan you will be approved for. The different types of loans are:<\/p>\n First-time homebuyer programs<\/a> and government assistance programs can help those buyers who are just starting out or need help. \u201cWe have a program here called House Charlotte, which is a down payment assistance program,\u201d comments Martin. \u201cYou have to prequalify to meet the income limits, but if you stay in the home for more than 10 years, it works like a grant and you don\u2019t have to pay it back.\u201d<\/p>\n When determining how much you can afford, lenders will also look at the following items that are contingent on your credit, DTI, and down payment (note: these aren\u2019t the only costs of a mortgage, but they are key factors that are accounted for in how much you can afford).<\/p>\n You will have to pay interest on the mortgage loan, and the interest rate a lender will approve you for, again, depends on your credit score and debt-to-income ratio. Generally, the worse your credit score, the higher your interest rate (if you\u2019re approved at all). Interest rates fluctuate<\/a> according to the Federal Reserve Board, and locking in a low interest rate can save you hundreds of thousands of dollars over the life of a loan.<\/p>\n Let\u2019s say you go to get a mortgage, but decide that putting down 20% just won\u2019t be feasible. You\u2019re not out of luck. Some conventional loan programs allow down payments as low as 3%. But that makes you a riskier borrower in the eyes of the lender.<\/p>\n Enter mortgage insurance (or what\u2019s called private mortgage insurance \u2014 PMI<\/a> \u2014\u00a0on conventional loans). Basically, it\u2019s insurance for the lender in case your loan goes into default. If your down payment is less than 20%, usually a lender will require that you pay PMI. Government-backed programs also may tack on their own form of mortgage insurance.<\/p>\n When calculating how much you can afford, your lender will also likely take into account the closing costs (origination fees, lender fees, settlement fees, and other fees, which can total on average between 2% and\u00a0 5% of the purchase amount), your taxes and insurance payments, and any reserve amounts that might be required.<\/p>\n Most lenders will look to see that you have at least two month\u2019s worth of monthly housing expenses saved up in addition to <\/i>your down payment.<\/p>\n Here are some scenarios run through HomeLight\u2019s Home Affordability Calculator<\/a> with different credit scores, incomes, and $25,000 worth of student loan debt so you get a feel for how much you might be approved. We plugged in the city of St. Louis, Missouri, just for example\u2019s sake; these numbers would also vary based on your location.<\/p>\nDebt and income<\/h3>\n
Credit score<\/h3>\n
Down payment<\/h3>\n
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\n<\/b>A conventional loan is a loan that is not guaranteed by a government agency. These loans are serviced by banks or other private financial institutions, and usually don\u2019t have any special requirements. Lenders of conventional loans look at your entire credit history when evaluating how much loan you\u2019ll qualify for, although it\u2019s possible to get approved for a conventional loan with a credit score as low as 620<\/a>.<\/li>\n
\nAn FHA loan is a loan from a lender that is approved and insured by the Federal Housing Administration, and these loans require as small as a 3.5% down payment.<\/a> However, there are often additional conditions that you\u2019ll need to meet, and the appraisal<\/a> has to be done by an FHA-approved appraiser.<\/li>\n
\n<\/b>A VA loan is a loan issued by the Veterans Affairs department of the U.S. government. With a VA loan, you may be able to get a 0% down loan, but you do have to meet the eligibility requirements<\/a>.<\/li>\n<\/ul>\nOther qualifying costs of getting a mortgage loan<\/h2>\n
Interest rates<\/h3>\n
Mortgage insurance<\/h3>\n
Additional costs<\/h3>\n
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<\/a>So how much can you afford?<\/h2>\n