How much can you afford to buy
When clients start looking for a home, one of the first questions I hear is “how much can I afford”? Or more specifically, “how much will the bank lend me”?
Believe it or not, the bank will usually lend you more than you are comfortable with.
This is because most loans don’t factor in living expenses like food, utilities, gas for your car, as well as other expenses that are not financed.
It’s important for you to keep the payment where you can comfortably afford it. But you also will want to get preapproved so you can shop in the right price range. Getting preapproved is where you provide income and credit documentation to a lender, and they see what you are qualified for.
Like mentioned earlier, this number can easily surpass what you are comfortable with. But once you have this number, we just need to back it off to your comfort level. We use the preapproval number as the ceiling of what you can afford. You can always borrow less but borrowing more is virtually impossible.
Here are some of the things that affect how much you can afford, that may make you think you can afford more than the bank approves you for. In other words, you feel like you make more money, but the bank may not see it the same way.
- Are you being paid “above the table”? In other words, are you getting cash or regular payroll? Under the table income cannot be counted in your approval.
- Overtime income and bonuses. This can be used if it is regular, but this is something that a lender should review.
- Self-employment. This can affect you because more times than not, the self-employed typically write off as much income as possible. This might reduce your income tax liability but will also reduce the amount you qualify to buy.
- Amount of down payment. More down payment can reduce your interest rate or your mortgage insurance. This leaves you more money for the monthly payment, allowing you to buy more house.
- Credit score. Better credit scores lower your interest rate and allow for more purchasing power. Don’t worry about your score though, there are programs for almost every credit bracket.
What to expect when getting approved
Getting preapproved is easy. Just supply your lender with the following paperwork. The lender will figure the rest out.
- Taxes or paystubs, depending on your employment.
a. If you have investments like rentals or dividends, the taxes will be required even if you are employed.
- Credit report (the lender will pull it). They just need your permission.
- A quick application. Usually, you can complete this in 10 minutes or so.
This is enough to get the ball rolling. There may be other things needed by the lender, but this is the base that everything is built off.
What to do next
If you are contemplating buying, the easiest path is to get preapproved. It shouldn’t cost you anything and it will help you start in the right price range. If you want some help finding a great lender, drop me a message or reach out to Redwood Real Estate.