While you might like to think something like a home purchase will always be out of your reach, the facts don’t always support that. In fact, many people may be surprised by just how much mortgage they can afford, even on a smaller income. Rather than think about how you can’t afford a home without investigating the facts, let’s take a deeper look and see just how much mortgage you can afford to take on.
Income: Before we look at how much mortgage you can afford you need to know how much money you are making. Your earnings should be consistent (or consistently rising) for at least the last six months to two years in order to qualify for a mortgage. Depending on your individual circumstances you are going to have to be able to show that. For most of us a simple pay stub should have all the information you need. You can also look back at your tax returns to show how much money you have made in the past.
Other Income: If you’re a freelancer or you work in a cash realm like a restaurant, that doesn’t mean you’re not going to be able to qualify; you just need to be more diligent. Make a deposit into your bank account once a week or twice a month and do the same thing for at least the six months. If your work ethics are good and you have been able to consistently pull in these amounts of money, then you should be able to qualify for a mortgage.
Debts: What does your debt picture look like? Before you figure how much mortgage you can afford, it helps to do something about all that debt. If you have a lot of credit cards, department store cards, student loans, personal loans, and overdraft loans on your credit report, this can limit the amount credit lenders are willing to extend to you.
Credit Report: Before you undertake the mortgage application process, it’s also wise to view and clean up your credit report. This could be a several month process so you don’t want to leave it to the last minute. Make sure that all the information on your credit report is accurate, and that old accounts or errors are removed by all three main credit bureaus.
Recurring Expenses: Another thing to take into account when figuring how much of a mortgage you can afford is what your recurring monthly expenses are. Be careful to include every expense, including your gym membership, cable and Internet, cell phone, car insurance, health insurance, food, and whatever else you pay for each month must be included. Tally these expenses up and make sure you are giving yourself an honest picture of what your financial situation looks like before you go through the mortgage application process.
Down Payment: Once you have carefully examined your finances, then you are ready to think about your down payment. Consider this carefully, because if you’re buying a fixer-up house then you can’t use all your reserves to put down on your home. If this is the case then you may need to save up for a couple more months until you have the money you need to make the repairs necessary to make your home livable.
Finding out how much mortgage you can afford really surprises some people; many others see how much they want and what they can afford and realize they aren’t quite ready. However, keep up with your savings, keep extraneous spending down, and you’ll be a home owner in no time!
For more information on budgeting or saving for your new home, contact CCSAC today. We’d be happy to give you advice on reaching your dream of home ownership.