When you start looking for a home, you should first consider what your budget will allow. You will want to make sure that the estimate is a comfortable amount. You will also want to shop with multiple mortgage lenders to see who can get you the best interest rate—the lower the interest rate, the lower the payments. The following terms will help to calculate affordability.
Annual Income
Annual income is the amount that you will use as a starting base. You will take the amount of gross pay that you make in a calendar year. If you buy a home with a co-borrower, you will also add in their annual income to get your total combined annual income. In order to find your annual income, you can refer back to your taxes on Line 7 of your IRS From 1040.
Total Monthly Debt
What are your current monthly debts? These are debts that reoccur monthly like rent, car payments, other loans, credit cards, alimony, child support, and any other debts. Once you take these debts into account, you will get a good picture of what you can start to afford with the debt-to-income ratio.
Debt-to-Income Ratio
Debt-to-income ratio (DTI) is a formula that results in a percentage that lets the lenders know how much money is coming into the household versus going out to pay off debts. Lenders look for a DTI of 36%. All lenders are different, and they will have regulations and limitations on their flexibility of DTI amounts.
Down Payment
The down payment is simply the amount of money that you want to put down on a home. It is a common thought that a 20% down payment is required. However, that is not the case. You can have as little as 3% down, depending on the loan. To learn more about the down payment, click here.
Interest Rate
The interest rate is the percentage amount that the lender is going to charge you to take out the loan. The interest rate will depend based on credit score and down payment. This is where we highly recommend shopping multiple lenders to get the best rates available. If you have a 15–30-year home loan, you want to make sure that you get the best offer. This interest rate will stay with your loan until it is paid off or is refinanced.
Loan Term
When you take out a loan, you will have to have an end date by which the total loan is to be paid in full. Most loans are for 30 years, but you can also take out shorter loans. When working the mortgage calculator, you can change the term of the loans to see the different payment options.
Private Mortgage Insurance
Private mortgage insurance (PMI) is insurance for your mortgage. It protects the lender against any losses if the loan goes into default due to the borrower not making payments. If the borrower’s down payment contribution is less than 20%, then the PMI will be attached to your mortgage. If the borrower puts a down payment of 20% or more, the PMI will not apply to them.
Property Tax
When you purchase a home, you will have an annual property tax added to your mortgage. This value will be assessed on the value of the property. Tax rates will vary depending on the state, county, and municipality.
Homeowners Insurance
Homeowners insurance (HOI) is required when purchasing a home while taking out a loan. The insurance will cover the residence. The price will vary depending on different variables. Contact your insurance provider for more information
Homeowners Association
A Homeowners Association (HOA) is an association that maintains the community and enforces the rules and regulations of the Covenant for a monthly fee. This is another factor that can affect the affordability of the home. When looking at homes, make sure you pay attention to the details of the neighborhood and community standards.
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