Mortgage Loan: How Much Can You Afford To Borrow?
Most of us want to own a home, but at what cost? Sometimes, waiting a few years to save money is the best financial decision to make before buying a home. Lenders these days are more than willing to loan money to borrowers who can’t really afford it. But just because you qualify for a certain amount, that doesn’t mean it’s in your best interest to sign the bottom line.
Avoid Being House Poor
How much can you really afford to take out, while maintaining the lifestyle you want? Many people sacrifice their quality of life just to own a home. They become house poor because most of their income goes toward their mortgage payments. Foreclosures are at an all time high in part because people are borrowing more than they can handle.
You want to have enough money left over to travel, participate in hobbies, eat at restaurants, buy new clothing, and visit places of interest.
Budget For Other Expenses
Also remember that a house comes with additional expenses, including property taxes, homeowner’s insurance, maintenance, and possibly Homeowner’s Association dues. It’s just like buying a car. In addition to car payments, you have to pay for gas, insurance, and maintenance.
Be sure that you figure in every expense before deciding how much to borrow. On top of all that, don’t forget about any future costs that might you have.
Personally, I would rather borrow less and use the extra money to upgrade the house, including new carpet, furniture, landscaping, and so on.
What good is it to have a nice home if you’re struggling to make the payments every month? I have seen horror stories where someone buys a new house only to find water damage above their ceiling. This ends up costing thousands of dollars, which they can’t afford. I would personally budget money just for maintenance.
Less is Better
I am a bit of an extremist when it comes to buying a home. Some think I’m nuts, and that’s fine. But my philosophy is simple. If I can’t pay cash for it, then I can’t afford it. If that means I can never buy a house, so be it. I will find a way to survive somehow, someway. I have seen plenty of nice apartments that I would be more than happy to spend my life in.
“Neither a borrower nor a lender be.”
I fully realize that some people have no choice to buy a home, particularly those with a family of five or more children. The key is to borrow for the least amount of years possible. A 15 year loan is going to cost far less than a 30 year loan. A 7 year loan is going to be that much less.
If you’ve established a budget, you should have a good idea of how much you afford to spend each month on a mortgage.
Just ask yourself: how much house do I really need? Forget about keeping up with the Joneses. They’re not the ones paying for the house.
Fixed or Adjustable Rate?
The two most common types of mortgages are fixed and adjustable rate. Both are pretty self-explanatory. With a fixed rate mortgage, the interest rate stays the same throughout the duration of the loan. An adjustable rate mortgage fluctuates throughout.
Fixed rate loans are the safer of the two. As a borrower, you’ll never have to worry about the rates going up, which inevitably will happen. Of course, an adjustable rate may be lower compared to the fixed for certain periods of time, but could be higher as well. This option is very risky for those who can’t afford higher payments.
If you plan on keeping your house long-term, then a fixed-rate mortgage is a wise choice. If interest rates drop significantly, you can always refinance.
The interest rate for a mortgage isn’t set until it’s signed, usually at closing. However, borrowers do have the option of locking in an interest rate when they apply. This is advantageous if you believe that the rates will be going up before the mortgage is finalized. Some companies do charge a fee for doing this.
Most real estate agents will request a pre-qualification letter before searching for a home. This letter confirms that you’re a qualified buyer and the price range is affordable. It’s not the same as being pre-approved, but it’s the first step.
Reputable agents often times will only work with those who are pre-approved, especially first-time buyers. Getting pre-approved adds credibility when making an offer, plus confirms how much can be borrowed. Real estate agents and relocation companies will help you through this process, as most have connections with various lenders.
The monthly payment, interest rate, closing costs, type of mortgage, and the reputation of the lender are all important considerations.
Direct lenders, mortgage brokers, sellers, and internet mortgage providers are all worth taking a look at. Cast a wide net when researching lenders to get the best loan. A lender will check your credit rating upon application. This is important to know because your credit rating can drop if multiple lenders request your credit report. Be selective which lenders you decide to apply to.
Check with the state banking authority to see if a particular mortgage company is licensed. The Better Business Bureau will list complaints that customers have had about the company.
Here are a few online mortgage lenders (note: I have not personally used any of these)
Lenders take various factors into account when determining credit risk, such as location, credit scores, and property taxes. They use computer programs to tailor mortgages to each individual buyer. Online lenders are known to offer lower interest rates than traditional lenders because their overhead is lower. The filing and approval process is far more streamlined with online lenders as well.
Online companies however do come with some risk. Some are not legitimate; they’re sole purpose is to steal your identification. Others are legitimate, but don’t provide good service. Look for lenders located in your state or nearby, as the process will likely go more smoothly.
Whether you get a loan from a bank or online lender, what matters most is that they’re trustworthy.
What You’ll Need
When filling out an application, you’ll likely be required to supply the following information:
- current and former home addresses
- sources of income (copy of paychecks may be required)
- all property owned
- list of current and previous employers
- social security number
- income tax returns from the last two years
Compare rates and terms of various lenders to get the best deal. Research the reputation of each company as well. How long have they been established? Do they provide good customer service? Are there any complaints? A simple Google search with the name of the company + complaints will give you an idea.