Home Buying Guide

How Much Home Can You Afford?

When you are ready to begin looking at houses, you need to prepare all of the necessary materials to present to the lender. Your lender will tell you exactly what you can afford so that you do not spend time looking at "too much" home. There are three key factors that you will need to consider when determining how much home you can afford. These are (1) the down payment; (2) your ability to qualify for a mortgage; and (3) the closing costs associated with your transaction.

Down Payment Requirements

Most loans today require a down payment of between 3.5% and 5.0% depending on the type and terms of the loan. However, you may be eligible to qualify for programs with as little as 1 % down. If you are able to come up with at least 2 0% down payment, you can possibly eliminate mortgage insurance. It is often thought that bigger is better when it comes to down payments. In many cases, this may be true. However, the arithmetic will differ from case to case. A bigger down payment means smaller monthly payments and lower interest expense for as long as you remain with a mortgage. This can be an important factor for many people. But if you can put your available funds to work for you so that they can earn more than the interest rate on your loan, you could be dollars ahead with a smaller down payment, and you can always invest that money into increasing the value of the house by either repairing and/or remodeling your home.

Closing Costs

In addition to the down payment on your dream home, you will be required to pay fees for loan processing and other closing costs. These fees must be paid in full in cash at the time you close on the purchase of the property (final settlement), unless you are able to include these in your financing and/or the seller pays them on your behalf.

Typically, total closing costs will range between 2-5% of your mortgage loan. Your lender will be able to provide a detailed schedule of estimated closing costs based on a hypothetical sales price.

Qualifying for the Mortgage

Most lenders require that your monthly payment range between 2 5-28% of your gross monthly income. Your mortgage payment to the lender includes four items ....the PITI. These items are discussed in detail on the page entitled, "Predicting Your Monthly Payment (The PITI)." Remember, when you buy a home all interest is tax deductible, so you will qualify for a major tax advantage that will effectively increase your take-home pay. Your total monthly PITI and all debts (from installments to revolving charge accounts) should range between 33-38% of your gross monthly income. This is a general rule of thumb, but other key factors specifically determine your ability for a home loan.

Key factors that determine your ability to secure a home loan

Income: History of employment, stability of income, potential for future earning, education, vocational training and background, and any secondary income such as bonuses, commissions, child support, etc.

Credit: History of debt repayment, total outstanding debt and total available credit. If you have concerns about your credit report, consider contacting one of the major credit bureaus for a copy of your file: Equifax (1-800-685-1111 or, TransUnion (1-800-888-4213 or, and Experian (1-888-EXPERIAN or

Assets: Cash on hand, other liquid assets such as savings, checking, CDs, stocks, etc.

Property: The home you are buying must be appraised to determine that it has adequate value and is marketable to ensure it will secure the loan.