To buy a new home you first need to know how much you can afford to spend on a house. To get a clear picture on where your house hunting sweet spot is you’ll need to do some budgeting and calculations with your current finances.
There are many factors that go into the affordability of a home, including your monthly mortgage payment and monthly expenses, annual income, your down payment amount, interest rates, your debt-to-income ratio, taxes, the length of your loan term and other associated costs such as home owner association (HOA) fees.
To help you calculate how much home you can afford and how much mortgage you can qualify for, follow the tips below and then plug the numbers in our mortgage calculator or home affordability calculator. If you have any additional questions don’t hesitate to reach out to one of our Mortgage Loan Originators to answer any questions you may have. You can find one in your neighborhood by visiting our mortgage page.
Calculate Your Annual Income And Monthly Expenses
The first thing to do when budgeting for a new home is to add up your annual household pre-tax income. This includes your salary, bonuses, commission, tips, and overtime. Also take into consideration any investment income, rental properties, alimony and child support. Put together a budget of how much you make and how much you spend on a monthly basis to determine how much you have in your budget for a mortgage, property taxes, HOA fees –if applicable, and homeowners insurance or Private Mortgage Insurance (PMI). Include all monthly expenses such as car payments, credit cards, student loans, how much you spend on gas and food, and your utilities. There are expected costs associated with homeownership to take into consideration and it’s recommended that you also plan for unexpected expenses related to owning a home.
Determine Your Down Payment Amount
A 20 percent down payment of the purchase price of the home is what most banks require in order to get approved for a mortgage. If you’re buying a home with a $250,000 price tag, you will need to have $50,000 for the down payment. If you cannot afford a 20 percent down payment, your lender may require PMI. The buyer pays for PMI and the lender is the beneficiary in the event the borrower defaults on the mortgage. Lakeland Mortgage also offers lender-paid mortgage insurance programs where there will not be any monthly payment for PMI.
Determining Your Mortgage Loan Term
A loan term is the length of time you choose to pay back the loan. A mortgage loan term is typically between 15 years and 30 years with a fixed or adjustable interest rate, all of which will be determined with your mortgage loan originator. Typically, the longer the loan term, the more interest you pay but in smaller monthly payments. To see an example of loan terms and interest rates visit our mortgage rates page.
Estimate Your Mortgage Interest Rate
Mortgage interest rates are constantly changing with the market and economy. Your mortgage interest rate will depend on a number of factors including your credit score, the loan term, the loan amount, your loan-to-value ratio, and the type of property.
Calculate Your Debt To Income Ratio
Your debt-to-income ratio is your monthly debt divided by your gross monthly income. With the new mortgage rule provisions to the Dodd Frank Act, the Ability To Repay and Qualified Mortgage, banks are looking for a debt-to-income ratio of 43 percent or less, but this can vary depending on the value of your assets and other factors.
Check Your Credit History And Improve Your Credit Score
Credit reporting companies analyze five categories to calculate your credit score, each carrying different weight: payment history, amounts owed, length of credit history, new credit, types of credit used. Under the Fair and Accurate Credit Transactions Act, you are entitled to receive one free credit report from each of the three national credit-reporting companies - Equifax, Experian and TransUnion - every twelve months. AnnualCreditReport.com is the only authorized online source for a free credit report. Additionally, you can order all three at once, or spread them out throughout the year for monitoring your credit. Once you have your credit report, review it for any discrepancies or unresolved issues. Work to improve your credit-worthiness in preparation for buying your new home. You will need a good credit score to get approved for a mortgage and the better your credit score, likely the better your interest rate.
Factor In Your Property Taxes
Property taxes are an annual tax paid quarterly on a homeowners' property and the tax amount is based on the value of the home. When buying a new home you typically will be required to set up an escrow account with your lender to help pay property taxes over the course of the year rather than paying one lump sum quarterly. You can find a home’s property tax value in New Jersey by using the New Jersey Property Tax List Search. You can also get this information by contacting your New Jersey county assessor, or the real-estate agent representing the seller.
Most lenders require homeowners to carry homeowners insurance that protects you in the event your property is damaged by a fire, natural disaster, or in the event you were robbed, and more. Homeowner's insurance can also include personal liability coverage, which will protect you against any lawsuits if someone is injured on or off your property. There are ways to cut the costs of homeowners insurance, which include security upgrades, smoke detectors, and storm windows.
Home Owners Association Dues
If you purchase a townhome or a condo, you may be required to pay homeowners association dues, also known as HOA fees. These fees pay for items such as landscaping, repairs to the property, garbage collection, snow removal, and other property maintenance.
If you have additional questions, contact Jody Michael Tobia at 973-935-7119 or jtobia at lakelandbank dot com. Reverse and conventional mortgages, are offered through Lakeland Mortgage, a trade name of Sullivan Financial Services, Inc. and a wholly owned subsidiary of Lakeland Bank.