Can You Afford a New Home? How to Determine Your Homebuying Budget
Photo Credit: Tim Hale
Courtesy of Chase
Figuring how much you can comfortably afford for your new home can be complicated. However, it's important to know your budget before you begin house hunting.
Being prequalified or conditionally approved for a mortgage is the best way to know how much you can borrow. Depending on where you are in your home search, there are different options that will help set your budget.
How to Get Started: Mortgage Prequalification vs. Conditional Approval
For prequalification, all you'll need to do is provide some basic information such as your income, employment and bank account, and your credit will also be checked. Then, you'll get an estimate of how much you can borrow — usually on the same day. It's a quick and easy process that can be done with just one conversation with your local mortgage banker or online.
If you're close to finding a home, a conditional mortgage approval may speed up your homebuying process by going through most of the application process before you find a home. This demonstrates to the sellers that you're a serious and prepared buyer. It also might put yours ahead of other offers.
Other Essential Homebuying Considerations
Credit Score
Banks look at your credit score, your income and the value of the home you're buying to determine how much they'll lend you. Credit scores range from 300 to 850 (less than 580 is very poor and above 720 is excellent). A higher credit score may lower your interest rate — and lower your monthly payment.
Monthly Mortgage Payment
Your mortgage payment should be no more than 28 percent of your gross monthly income. For example, if your monthly gross income is $5,000, you might be able to afford a $1,400 monthly mortgage payment.
Down Payment
Consider using some savings for a down payment. If your down payment on a conventional loan is less than 20 percent, you must pay private mortgage insurance (PMI), which covers the bank if you stop paying your mortgage and default on your loan. PMI usually costs less than one percent of the outstanding loan balance, so putting 20 percent down can save you thousands of dollars over the life of the loan.
Use the affordability calculator from Chase to find out how much house you can afford, and learn more about the homebuying process by visiting My New HomeSM.
