How First Time Home Buyers Determine How Much They Can Afford

First time home buyers often do not know exactly how much they can afford to finance through a mortgage. Unfortunately, there is no magic formula in order to decide the right size mortgage. However, the three most important criteria are: how much you qualify for, your down payment size and your monthly payment ability.

Loan Pre-Approval

Getting pre-approved for a loan will help you understand how much you can afford before you begin looking at houses. Most people will not have a good understanding of the mortgage size they can attain because mortgages are actually quite larger than many people expect. Mortgage approval is largely based on income and credit score. Most first-time buyers will be surprised to see the loan amount they qualify for.

Down Payment Size

You cannot buy a home with a mortgage alone. You will need to meet minimum down payment requirements in order to purchase a property. The typical down payment requested by a mortgage company is 10% to 20 %. However, some mortgage lenders may allow you to put less down, especially if you have an FHA guaranty on your loan. The FHA guarantees loans for first time home buyers in order to provide private lenders security in case of a default. The organization agrees to purchase the loan out of default.

You should be aware that there are more cash requirements to purchase a home aside from down payment. You may also incur expense during the loan origination. You may have to cover the cost of an inspection. In all cases, you will be required to pay closing costs around 3% of your total home sale. You can ask for the seller to pay the closing cost as part of the negotiation of your purchase, but this is not a guaranty.

Both down payment and closing costs calculations work the same way. For example, if you are considering buying a home that is $200,000, if your down payment is 20%, you are required to bring in $40,000 and approximately 10,000, or 5% in closing costs. Government loan calculations work the same way.

Monthly Payment Affordability

Many first time home buyers think about the total price of the home instead of the monthly mortgage payment. This is a mistake on many levels. First, the price of most homes is incomprehensibly large, and it can scare you away from the purchase. A mortgage of $300,000 may end up costing only $1,500 per month, depending on the down payment and mortgage rate. For many people, this is lower than renting an apartment. Also, you must factor in other costs of ownership. However, especially in expensive markets like large cities, mortgages can be cheaper than rent.

The second issue arises during negotiation. Borrowers negotiate for a lower price on a home without considering how to lower monthly payments. Instead of asking, for example, for a mortgage buy down to decrease monthly payments in early years, they ask for $10,000 off the mortgage, which will do little to help them afford the home.