How to Purchase a Home
If you’ve made it to this page you’re probably thinking about purchasing a home in the near future. You’re also a little confused about how to start achieving your homeownership dream. That’s because most people don’t have hundreds of thousands of dollars sitting around to purchase a home in cash, which is why home loans exist. The problem is that many aspects of the loan process involve nonintuitive calculations and confusing terms that lenders love to throw around. Our goal here is to help you purchase a home with confidence, taking things one step at a time. Alright, let’s get started!
How Much Can I Borrow?
Actually, it’s better to ask “How much can I afford?” because a loan boils down to monthly payments made over a long period of time, usually 30 years. This is the first question we have to answer before you go crazy searching for homes out of your price range. Luckily, there’s a simple rule called the 28/36 rule to help you stay within budget. The rule requires that your home loan payments be no more than 28% of your monthly income, and your total monthly debt be no more than 36% of your gross monthly income. Following those constraints, we see that if you use the maximum 28% of your income on mortgage payments then all other debts (car payments, education, credit cards, etc) must be satisfied with only 8% of your income. For many people this is not possible, so the percentage of monthly debt for your home loan must be lowered. On this page, you will find a calculator built to give you a quick estimate of the maximum loan payment you can afford.
Save for a Down Payment
Remember that banks only have so much money to lend each day, so they need to choose their investments wisely. Lenders won’t take high-risk investments when there are better alternatives, or more qualified borrowers searching for loans. People who can pay 20%, or more, of their home cost up front, are seen as less risky. This payment is known has a down payment and lenders usually require at least 20% down for a conventional loan. Having said that, there are different types of loans, such as FHA or VA that will accept a lower down payment but these have additional requirements. We won’t discuss the different loan programs on this page, but don’t give up hope because of your down payment. Now, if you subtract your down payment from the home price and divide the result by the original home price you get the loan-to-value ratio (LTV). In other words, you get the percentage of the loan the lender is paying for. Keeping this value as low as possible, by putting more money down, will increase the chances of being approved and will result in lower interest payments.
Determine Your Interest Rate
Now that we know how much you can afford on your monthly mortgage payment we need to determine your interest rate. With these two values, we can estimate the home value that you can afford and your home searching can finally begin. Unfortunately, we won’t know the exact interest rate until we have a complete picture of your financial standing and a lender committed to fulfilling your loan. Until then, you should continue to work on your credit score and save for a down payment.
Apply For A Loan
If you have read this page and feel that you can afford that house you want that’s great! Your next step is to submit your application to a lender so we can lock in your interest rate. Using PC Mortgage’s online technology you can upload everything and submit your application to a lender or multiple lenders. Our loan officers will also be available to guide you towards the right loan program should you need an unconventional loan.