Posted in: Buying a home, Getting a mortgage, First time homebuyer tips

How to determine what you can afford when buying a home

What can I afford when buying a home?

Key insights:

  • Buyers can determine their buying power by reviewing different financial factors and researching common loan types and terms.
  • Lenders will look at a borrower’s monthly debt compared to their monthly income.
  • While a large down payment can be advantageous, various loan types exist for buyers with different financial backgrounds.

Many first-time homebuyers start dreaming of homes well in advance of finding out what they can responsibly afford. And while searching for homes online can be exciting, there are a series of financial factors that should be explored before you get serious about buying. Here’s what to know as you determine what you can truly afford when buying a home.

Remember, every buyer is different, so it’s important to work with a mortgage consultant or financial advisor who understands your background and can provide a personalized, professional assessment of your finances.

Your debt-to-income-ratio

After you apply for a loan, your lender will review your financials to determine how much of your monthly income is spent (or will be spent) paying off accrued debt. The calculation of this number is called your debt-to-income ratio. Lenders calculate your debt-to-income ratio to ensure that buying a house will not be too much of a financial burden over time.

Down payment gifts and assistance programs

A larger down payment can increase your buying power and help to provide favorable loan terms. But while many buyers are able to reliably pay a monthly mortgage payment, they may have a harder time coming up with a significant down payment at the time of closing.

For some buyers, there may be additional options to boost your buying power without a large down payment.

  • If you have generous friends or relatives who want to help you get a leg up on your home purchase, you can use a mortgage gift fund for your down payment.
  • Depending on your income, debt, credit score and a few other factors, you may be eligible for down payment assistance programs in Minnesota or Wisconsin. These programs are not available through all lenders or may not be offered during certain times. Check with your mortgage consultant for current options.

Loan types: Limits, terms and more

You may also find it helpful to research loan types and determine which will be the most advantageous for you. Some loans offer more favorable terms to those with a higher down payment and stronger financial history, while other “helper” loans are available to buyers who can’t put as much down at closing.

There are three main ways that major loan terms vary:

  • Down payment minimum: Loan types vary in the amount they require for a minimum down payment.
  • Loan limits: Some loan types have a ceiling, meaning that the loan cannot exceed a specific amount.
  • Mortgage insurance: If a borrower puts less down at closing, their lender may require them to pay mortgage insurance.

Learn about the down payment minimums, loan limits and other terms of:

Mortgage interest rates

The mortgage interest rate you qualify for will also greatly affect affordability. The lower your interest rate, the more home you can afford because you will pay less interest monthly and over the life of the loan.

Here’s an example: If you are approved for a 7% interest rate on a 30-year fixed-rate loan for $300,000, your monthly mortgage payment would be about $2,239 per month.

If your interest rate rose to 8%, but all other factors remained identical, your monthly mortgage payment would increase to about $2,693 per month. That means that by inflating the interest rate by just 1 percent, you would end up paying on average $3,000 more in interest annually — and $90,000 over the life of the loan.

When talking with your lender as you apply for a loan, you can ask them if any factors in your control affect your interest rate.

The hottest trend: Responsible homeownership

By understanding what factors affect your buying power, you are one step closer to becoming a responsible homeowner and avoiding these first-time homebuyer mistakes.

If you’re ready to move beyond affordability research to see what you can truly afford, consider getting pre-approved by a lender. It’s a no-obligation process that can illuminate your buying power and put you on a fast, successful path to homeownership.

To move forward with your home buying process, reach out to Edina Realty or your agent today.

Edina Realty Mortgage is an affiliate of Edina Realty. See Affiliated Business Arrangement Disclosure Statement

Prosperity Home Mortgage, LLC may operate as Prosperity Home Mortgage, LLC dba Edina Realty Mortgage in Minnesota and Wisconsin. ©2023 Prosperity Home Mortgage, LLC dba Edina Realty Mortgage. (877) 275-1762. 3060 Williams Drive, Suite 600, Fairfax, VA 22031. All first mortgage products are provided by Prosperity Home Mortgage, LLC. Not all mortgage products may be available in all areas. Not all borrowers will qualify. NMLS ID #75164 (For licensing information go to: NMLS Consumer Access at Licensed by the Department of Financial Protection and Innovation under the California Residential Mortgage Lending Act. Licensed by the Delaware State Bank Commissioner. Georgia Residential Mortgage Licensee. Massachusetts Mortgage Lender and Mortgage Broker MC75164. Licensed by the NJ Department of Banking and Insurance. Licensed Mortgage Banker-NYS Department of Financial Services. Rhode Island Licensed Lender. Rhode Island Licensed Loan Broker. Rhode Island Licensed Third-Party Loan Servicer. Also licensed in AK, AL, AR, AZ, CO, CT, DC, FL, ID, IL, IN, KS, KY, LA, MD, ME, MI, MN, MO, MS, MT, NC, ND, NE, NH, NM, NV, OH, OK, OR, PA, SC, SD, TN, TX, UT, VA, VT, WA, WI, WV and WY.

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Status Definitions

For sale: Properties which are available for showings and purchase

Active contingent: Properties which are available for showing but are under contract with another buyer

Pending: Properties which are under contract with a buyer and are no longer available for showings

Sold: Properties on which the sale has closed.

Coming soon: Properties which will be on the market soon and are not available for showings.

Contingent and Pending statuses may not be available for all listings