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April 19, 2017
Determine Your Home Buying PowerWhether you’re buying a fixer-upper or your dream house, you’ll need to determine your home buying power. Your home buying power is the result of several variables, all of differing importance. However, they can be grouped into five larger, more general groups that will determine your power to buy the home that’s right for you. Let’s take a look at each of them.

Where do you live?

Every housing market is different. Similar homes can have very different values in different markets, and property taxes vary from state to state and (sometimes) from city to city. It’s not just property values and taxes, though. Local rules and regulations, as well as available lenders, will all play a part in determining your home buying power in a given market. Property type can alo determine eligibility. Condos, for instance, often have homeowner associations tied to them, and some home buying programs may only apply to certain types of property.

Once you determine which market you want to buy a home in, also determine the type of home you’re looking for. Do you want to buy a small cottage? A ranch home? A townhouse? Get a general idea. However, before you fall in love with a specific property, make sure you consult with a lender first. Get an idea of what you want and what you’re able to purchase, then go looking for specific homes that fit in your price range.

What’s your annual income?

After you know where you want to purchase a home, determine your annual household income. Your lender will look at your last two years of income when determining your buying power. Everything that contributes to your annual income can make your home buying power stronger. Sources of annual income can include, but are not limited to:

  • Salary
  • Wages
  • Tips
  • Investment income
  • Commissionable income
  • Miscellaneous income, such as royalty checks

What’s your monthly debt?

After that, total up all the debt you have to pay every month. Keep in mind that these are debts rather than expenses. Paying off a car (which you had to borrow money for) is different from your grocery bill (which, hopefully, won’t put you into debt). Common types of monthly debt include:

  • Credit card debt
  • Car loans
  • Student debt
  • Any other miscellaneous debts or payments

Your income and monthly debt go into what’s known as your debt-to-income ratio, or DTI. Your monthly debt is divided by your gross monthly income, and that number is your DTI. Generally, lower is better.

If you want to increase your home buying power, don’t incur any new debt before looking for a new home. If you need a new car and a new house, get the house first. Saddling yourself with new car payments just before you get a new home will affect your buying power.

 Determine Your Home Buying Power

What’s your credit score?

Lenders won’t just look at your monthly debt. Your credit history will come into play. Home buyers with better credit scores will, in general, qualify for better loans. Your credit score is made up of:

  • Payment history
  • Amount owed
  • Length of credit history
  • Credit mix
  • New credit

A lot of people stress out over it, but evaluating and optimizing your finances doesn’t have to be intimidating. See our ”Do’s and Don’ts of Mortgage Loans” infographic for more tips on how to get your financial house in order.

How much down payment can you afford?

Lastly, figure out how much of a down payment you can put toward your new home. You might have heard that down payments are typically 20 percent of a home’s value. While they certainly can be that much, that amount is not universal. There are programs available for home buyers looking to put forward a lower percentage of a home’s value, so don’t let that 20 percent number stand in your way. Still, being able to put forward a larger down payment will afford you a better home and a better mortgage in the long run.

Your lender can work with you to determine how much of a down payment you should offer, while taking into account details like your credit score and DTI. With everything laid out in front of you, you and your lender can determine what kind of home you can purchase and what you can pay on your mortgage. Soon you’ll be on your way to owning a new home!

 

We hope these tips bring you closer to purchasing the home of your dreams! If you’ve gathered the funds and are ready to start the next phase of your homebuying journey, contact us, and we’ll get you started. You can also share any budget-friendly ideas you have with us on Twitter or Facebook.

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