Finding your dream home is exciting beyond belief! But finding out you can’t afford your dream home can be downright depressing. 🙁
Don’t fall into the trap of shopping for a property that you can’t afford. Find out how much you can really afford to borrow when buying a Boston house before you start the search. Your real estate agent is there to help guide you to great lender resources if you don’t already have one in mind.
Percentage of Income
Home loan lenders calculate your loan affordability based on a percentage of your income. But it isn’t just the loan that is factored into this calculation which is called a debt-to-income ratio (DTI Ratio). The DTI ratio adds all your monthly debt obligations such as car, credit cards, personal loans, and student loans and then considers the total amount of the proposed home loan as well.
There are two ways the lender looks at this:
- All monthly debt other than the home loan cannot exceed 28% of your total monthly gross income.
- When the loan is added in, this ratio cannot exceed 36% of your income.
Of course, the DTI ratio is just one component the lender is looking at.
The loan will be contingent on your credit score, payment history, and the total amount of outstanding debt. Generally, the higher your credit score, the lower your interest payment.
This can affect the house you want to buy because if you can keep the interest rate as low as possible, your monthly payments on the same loan value go down. That means the 36% is getting you more house for your debt.
A good loan officer will look at various things to help you bring the interest rate down. He might recommend paying some credit cards off (but likely keeping those credit lines open – seems counter-intuitive, but it would show a smaller percentage of your available credit line already drawn).
He might also recommend putting a higher down payment on the house to qualify for better interest rates. Talk to your lender about various programs to help new home buyers and qualify for as much home as you can afford.
Shopping for the Best Loan
Don’t assume every lender is the same – they are not! Some lenders are very stringent about loan application qualifications. Brokers may have other lenders with different guidelines making lower rate loans more accessible to new borrowers with less than perfect credit. Talk to your real estate agent, asking for mortgage lender referrals.
Also consider local banks and credit unions who understand nuances about the market and property type, and might be able to advocate for your loan application during their weekly underwriting meetings.
Keep in mind that you don’t want to put applications in at a ton of places because this could adversely affect your credit score if done in a short period of time. Instead, put together a package of what is required in the loan and ask the lender to review things. If you like what solutions they offer, then go forward with the full credit and loan application.
What You Know You Can Afford
Don’t be lured into going above your budget because a lender says you qualify for a bigger loan. Responsible borrowers already have a dollar amount in mind and are happy to search for a home they can afford that is less than the maximum loan amount. Just because a lender says you can afford a $5,000 monthly mortgage payment in Boston house? We can help! Send us a message or give us a call today! (617) 657-9811
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The property listing data and information set forth herein were provided to MLS Property Information Network, Inc. from third party sources, including sellers, lessors and public records, and were compiled by MLS Property Information Network, Inc. The property listing data and information are for the personal, non commercial use of consumers having a good faith interest in purchasing or leasing listed properties of the type displayed to them and may not be used for any purpose other than to identify prospective properties which such consumers may have a good faith interest in purchasing or leasing. MLS Property Information Network, Inc. and its subscribers disclaim any and all representations and warranties as to the accuracy of the property listing data and information set forth herein.