When considering purchasing a home—whether it’s a first or second home—the first step is to determine the mortgage payment you can afford and think about your financing options. You’ll also want to gather information and collect documentation that will be needed for your application so the lender can fully evaluate whether to approve you for the mortgage.
Here are some important points to be aware of when figuring out how much debt you can realistically take on in a mortgage.
The Affordability Rule of Thumb
When creating a sustainable budget, the typical rule of thumb from financial experts is not to spend more than 30 percent of your gross monthly income on housing. This rule isn’t as straightforward as it initially seems. In fact, 30 percent is a conservative benchmark that doesn’t fully explain the variables under consideration.
“Depending on the circumstances, a lender will usually allow up to 40 percent of a borrower’s monthly gross income to be tied to the borrowers’ total monthly debt,” says Lisa Maldonado, assistant vice president and executive loan officer with Bank of Hawaii. (This percentage is often referred to as your debt to income ratio.)
Maldonado, who has a 20-year background in mortgage lending, points out that everything that appears on your credit report needs to be taken into consideration. When calculating your debt to income ratio, lenders will, in addition to the new potential mortgage payment, include any existing debt obligations, including, for example, payments you’re making to loans, student debt or credit card balances.
When making sure they’re under the 40 percent limit, Maldonado says potential homebuyers should focus on their current saving ability. They need to be able to show the lender they can handle a potential housing payment increase (when taxes or HOA dues change) or unexpected expenses once they take on the mortgage.
Seek Out Your Loan Officer
For homebuyers who need help figuring out exactly how much money is needed for a down payment and how much they can afford in a monthly mortgage payment, Maldonado recommends reaching out to a licensed loan officer. This way, a qualified expert can review your application and answer any questions early on in the process.
Knowledge is your best asset when deciding to take out a mortgage. Buying a house, particularly for the first time, can seem intimidating. However, there’s help available every step of the way. Rather than going it alone, reach out to experts who can help you review the numbers and make sound financial decisions.
To increase your chances of finding a great home you can afford, there is one thing you should do before you even call a real estate agent.
“Always seek to get pre-qualified for a loan before speaking to a real estate professional,” says Maldonado.
While a pre-qualification is not a loan commitment and is based solely on information provided by the borrower, this will help potential homebuyers know what price range they can realistically afford. Because there’s more to the question of how large of a monthly housing payment you can take on than just simple income.
“A second aspect to the pre-qualification stage is how much money the borrower has saved for a down payment, closing costs and reserves,” says Maldonado. “Many times, what someone can ‘afford’ does not necessarily mean they have the corresponding down payment requirement available.”
Not all lenders have a 100 percent financing option and will likely require some amount of down payment. Learning important points like this one are what makes speaking to your loan officer and getting pre-qualified smart money moves. Visit the Bank of Hawaii booth at today’s Homebuyers Fair to speak with a mortgage professional and learn more about your down payment options, or use our online mortgage application SimpliFi Mortgage by Bank of Hawaii to get prequalified for a loan online.
Session 1: Buying a Home What you need to know (Discussion by a panel of experts) 9:30–10 a.m.
Session 2: Selling Your Home—Where do you start? (Discussion by a panel of experts) 10:30–11:00 a.m.
Session 3: First-time Homebuyer Seminar 11:30 a.m.—noon
Small group sessions will follow each presentation for those who have more questions. Plus, buyers can meet one-on-one with bank professionals to discuss their personal financial situations and to get prequalified for a loan.