Buying a home is an exciting milestone, especially when it’s your first property. One of the first steps you’ll take in the home-buying process is qualifying for a mortgage. You may soon find, however, that there is a vast world of difference between how much money you qualify for versus how much would be financially responsible to assume. Use this guide to ensure you make the best decisions for your financial future while buying that perfect home.
Qualifying for a Home Loan
When you begin an online application or in-person evaluation for home loan qualification, the first question will be about your income. This question may not be as straightforward as it seems. You should only consider the income that will pay the loan.
For example, if you earn regular work income but also have a side business, only include that business’s income if you’re planning to have it available for loan payments. If you have outside income that’s already dedicated to a specific purpose (e.g., paying down debt, saving for a future expense, etc.), don’t include that in your financial calculations. After all, you can’t spend that money twice.
If you will be buying a property with someone else, their income can count toward qualifying for a mortgage, as well, with the same caveat that it should only count if it will be used toward future home loan payments.
Debt-to-Income Ratio
Banks use a calculation called a debt-to-income ratio to determine (1) how much income you have, (2) how much existing debt you have and (3) how much additional monthly debt, via your loan payment, you will assume. About 30 percent of your counted monthly income can be assigned to debt payments, which is why it’s really important to have a good awareness of all of your debt and only count the relevant income. Keep in mind that the monthly home loan payment calculated in this step is the maximum you can afford — you certainly do not have to borrow the maximum amount.
Personal Expenses-to-Income Ratio
This isn’t a calculation your mortgage lender will figure but it’s one you should consider. Pull together an accurate picture of where all of your counted household income goes on a monthly basis. Make sure to include the home insurance and property tax rates you’ll pay. This is to ensure that you have a good grasp of your recurring, expected and unexpected costs. The danger of only relying on the debt-to-income ratio is forgetting about other non-debt recurring payments you’re already making and will continue to make. After you’ve got your budget pulled together, make sure the cost of the mortgage calculated in the last step is feasible.
Final Steps
Finally, compare how the mortgage you can feasibly borrow relates to your local housing market. Keep in mind that you may need to look in various suburbs or nearby towns to find the right match. And always remember that the asking price is just that — you can often negotiate lower. Each step you take to cut costs will make you financially strong all the way around.
Did you know that ADP has a Real Estate Service Team (REST)? Working with this team, you’ll have guidance on qualifying for your home loan, determining your debt-to-income ratio, building a sensible budget based on your personal expenses-to-income ratio and figuring out which locale works best with your available loan monies. Get started and you’ll soon head home to a great property.