What Can You Afford?
Determining how much home you can afford means figuring out what size mortgage a lender will qualify you for. To calculate this number, lenders use:
- Your income
- Your credit rating
- The size of the down payment
- The length of loan (15 years vs. 30 years)
- The amount of your outstanding debts
- The interest rate for your mortgage
- The likelihood that you won’t be able to pay back your loan
Using our Home Affordability Tool, you can estimate what size mortgage you’ll qualify for, and what the monthly payments will be depending on the size of your down payment. By getting these estimates, you’ll be confident entering realistic figures when you go to get prequalified or preapproved for a loan.
When lenders analyze your general position as a borrower, it is called prequalification. Using only the information that you provide, the prequalification process enables a lender to estimate what size mortgage you will probably qualify for (and therefore how much home you can afford). Keep in mind that prequalification isn’t an application for a loan nor a lender’s commitment to offer you a mortgage.
So why get prequalified? First of all, it gives you an idea of what you can borrow so you don’t waste time looking at homes you can’t afford. While looking for a home, it will also help in making an initial offer because it is evidence that you will be able to pay for the home. Third, when you apply for a loan, it will speed the process because you will have already assembled all of the financial documents that you’re likely to need.
You can get prequalified for free in less than 5 minutes at E-LOAN. All you need to know is how much you want to spend on a home, and basic financial information about your income and debts.
The Total Cost of Buying and Owning a Home
Many people get in over their head financially by failing to estimate the total cost of buying and owning a home. When estimating how much home you can afford, include the following items:
- Real estate agent or realtor (if you use one): 2-3% of purchase price
- Down payment: 1-20%
- Fees for financing to loan representative: 1%
- Closing costs including appraisal, pest-control inspector, home inspector, escrow holder, and title insurer: typically 5%
Once you own the home, don’t forget there are costs of ownership:
- Mortgage payments
- Homeowners insurance