Updated: Jan 18, 2021
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When looking to buy a home, you should understand the factors that go into your borrowing power and you will need to compare this to your current living expenses. We should always keep in mind what we can afford because this can help or hurt us in the future.
When you apply for a home loan there are factors used by creditors that you should be aware of, here are a few that we would like to highlight:
Your annual income (before taxes)
The home prices in the location you are looking in
The desired mortgage term
Your credit score
Your monthly recurring debt
These factors will be determining factors of what mortgage you actually qualify for. The debt-to-income that will count will be your debt divided by your annual income before taxes.
Roughly 90% of loans are 30-year mortgages. There are also options like 20,15, and 10 year mortgages. If you can afford to get a shorter loan, this will save you thousands, if not over 100,000$ throughout the lifetime of the loan. This will most likely give you a lower interest rate than a longer loan as well.
If you are buying a “forever home” you can consider what is most important to you by thinking about your long term plans.
A lower monthly payment?
The future of not having to make a large monthly payment?
The difficult questions for those getting a 30-year mortgage are...
Will you pay it off faster than expected?
Can you predict the next 30-years of your financial life?
Have you looked at a mortgage calculator yet?
What can you afford?
This is important because it is very possible that the creditor will offer you more than you expect. Many of us have experienced this at a car dealership when getting a car loan.
Buying a house is similar but much more complicated. It can be very easy to be unprepared and this may lead to someone taking advantage of your situation.
When you buy a home:
Your taxes, interest, insurance, and home loan are all combined and this number isn’t completely "fixed" even if your monthly payment on the home loan is.
Regardless of your loan agreement, your taxes and insurance will change year by year. Sometimes this will be in your favor and other times it won't. This is one of the many reasons that looking into your personal affordability is so important.
What you can afford should be a separate concern. Just because you qualify for it, doesn’t mean you can afford the additional expenses. More than likely, you will have an increase in utilities, your car insurance may go up, you may get a payment plan to furnish your home, or maybe you will be required to update or buy new appliances, etc.
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