Unless you expect to rent all of your life, you’re going to need to buy a house of your own. You will need to figure out in what neighborhood to live in.
You’ll need to figure out how long you expect to live in the house. However, this is only one piece to the puzzle.
The main thing you will need to determine is how much house you can afford.
After all, and as any financial advisor will tell you, taking a 30-year home loan for a house is a major financial. And it should not be taken lightly. The worst thing you can do is to get a loan that is too expensive for your budget.
So knowing how much house you can afford can help you determine whether or not you’re ready to buy a house.
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Here are some strategies that can help you determine how much house you can afford.
1. Do a Budget.
First up, do you have a budget? As any financial planner would say, buying a home is perhaps the biggest expense you will ever make in your life. When you are a homeowner, not only will you have to account for basic expenses like food, transportation, entertainment, etc, you will also have to account for monthly mortgage payments, home repairs, etc…
So, having a budget is an important step in determining how much home you can afford.
2. Increase your Credit Score.
How much house you can afford also depends on your credit score. In fact, mortgage lenders aren’t likely to offer you a mortgage loan if you have a bad credit score.
Although you can get an FHA loan with a 580 minimum score, but there are things to consider when taking an FHA loan, like paying for a private mortgage insurance (PMI).
So, a good credit score will not only help you get qualified for a loan, but it will also help you get the best terms and rates possible. So the higher your credit score, the better.
Get a copy of your credit report for FREE and address any mistakes immediately. You can call the 3 credit bureaus (equifax, equinox, and transunion) to report any inaccuracies. Once you do that, the next step is to try to raise your credit score.
One of the ways to improve your credit score is to pay all of your bills on time. Payment history accounts 35% of your total credit score. So, it’s crucial not to have late payments.
Another way to raise your credit score is to keep your credit balance under 30%. For more information, read: How To Raise Your Credit Score to 850.
Feeling Overwhelmed With Your Finances?, You have options and there are steps you can take yourself. But if you feel you need a bit more guidance, simply speak with a financial advisor. SmartAsset’s free tool matches you with fiduciary advisors in your area in 5 minutes. If you are ready to meet your goals, get started with Smart Asset today.
3. Down Payment.
Your down payment is crucial in figuring out how much house you can afford. It is so because the larger the down payment, the less financing you will need, which also means the lower your monthly mortgage payment will be.
So although you can put a down payment as low as 3.5%, the rule of thumb is to put 20%.
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4. Beware of Closing Costs.
In addition to coming up with a sizable down payment to purchase your home, you will also need to think about the closing costs. Closing costs typically cover the home inspection fees, attorney’s fees, appraisal fees, etc.
Closing costs can range from 2 to 4% of the home purchase price. Depending on the home, closing costs can cost you a lot of money.
5. Get Pre-approved for a Morgage.
One way to know if you can afford a house is to get pre-approved for a mortgage. Mortgage lenders will gather your financial information like your salary, debt, employment history, and credit score, before they decide to give you a loan. Getting pre-approved is important, because at least you know you’re shopping for a house within your budget.
One word of caution though, a mortgage lender can give you a bigger loan. So make sure you can afford it. In other words, just because you’re qualified for a specific amount of money, does not necessarily mean you can afford it. So, review your budget before making a decision.
Related: Apply for a Mortgage Loan Today
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