Conventional Home Loan
Purchasing a home is a true milestone in life. It is an exciting process to see many years of hard work coming to fruition in the form of homeownership. As you prepare yourself to make this significant purchase, it is vitally important to understand exactly how much house you will be able to buy with your current income and other financial assets.
Trying to figure out what kind of a house you can afford might seem complicated, but it is really quite simple. Here are some great tips to consider when choosing the right house for you.
- What Is Your Total Monthly Income?
- The 25% Rule
- Using a Mortgage Calculator
- The Down Payment & Closing Costs
- Property Taxes
- The Benefits Of A Conventional Loan
- Debt To Income Ratio
- Conventional Mortgage Loans
What Is Your Total Monthly Income?
Calculate the total net monthly income of all wage earners in your household. If your take-home pay is $1,899 and your spouse’s is $2,340, you have a total net income of $4,239.
The 25% Rule
The 25% measurement rule is a great way to make sure that you do not get financially over your head with a home purchase. Taking the above example of a couple who has a net monthly income of $4,239, an approximate monthly mortgage payment of $1,060 would be appropriate.
Keep in mind however that you will also need to pay real estate taxes, homeowners insurance, and association dues if applicable. These costs could add several hundred dollars more to your monthly payment.
Using A Mortgage Calculator
Home affordability calculators are a great way to quickly figure out what a mortgage payment would be on a particular home. Just by entering some basic information, a mortgage calculator will do most of the work for you. Click here to access our Mortgage Calculator.
The Down Payment & Closing Costs
The amount of the down payment that you make can play a huge role in your monthly mortgage costs. Typically, most mortgage companies like to see a down payment of between 10-20% of a home’s purchase price. However, with Conventional loans, the down payment can be as little as 3%.
Keep in mind though that with down payments less than 20%, you will be required to pay private mortgage insurance (PMI), which is a policy that protects lenders in case of mortgage default. In addition, new homeowners should be prepared to pay loan closing costs, which can vary depending upon the lender’s guidelines.
One of the most important aspects of determining the affordability of a home is property taxes. Every residential property owner has to pay taxes to their county on an annual basis. Based on where you live, property taxes can vary widely and are often based on the value of the home.
As you evaluate how much home you can afford to buy, be sure to get an accurate estimate of the annual property taxes that are levied on the property each year. Many homeowners will include the cost of taxes and insurance with their monthly mortgage payment to the lender. These funds are put in a special escrow account and paid on behalf of the homeowner as needed.
The Benefits Of A Conventional Loan
There are many benefits to purchasing a home with a conventional loan, including:
- Sellers look favorably on buyers with Conventional loans.
- Lower interest rates, based on the buyer’s credit score.
- Lenders have greater flexibility with payment options, terms, etc.
- 15 or 30 year fixed rate loans are available.
- Down payments as low as 3%.
Debt To Income Ratio
With regard to being offered a lower interest rate on your loan due to a favorable credit score, it is also important to have an acceptable debt to income ratio. The debt to income ratio is a measurement of the percentage of a homeowner’s monthly gross income that goes towards the payment of debt obligations. Mortgage experts say that a prospective homebuyer’s debt to income ratio should be 36% or less (including their mortgage payment).
Conventional Mortgage Loans
The highly experienced and knowledgeable team at Better Lending has helped thousands of our customers obtain a conventional loan to purchase their dream home. Contact us today to learn more about how we can help you find the right mortgage to fit your specific needs.
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Borrowers are allowed to have Private Mortgage Insurance (PMI) removed from a home loan in two ways, automatically or by request.