Can I Afford a House?

Looking to buy a house but don’t know if you can afford it? It’s always good to know that you can afford the cost to buy a house before you make the big decision. The list below is a good checklist of answers you need before you fully decide to go all in. If you want to learn more, be sure to Contact me for my Home Buyer’s Guide.

 

1.)   Should I get a pre-approval?

            A pre-approval or conditional commitment involves a formal application process and provides you with a formal commitment from a lender stating how much you can borrow and at what rate. By figuring this out you’ll get a better idea on whether or not you can afford the cost to buy a house.

2.)   What’s the difference between a pre-approval, pre-qualification and pre-commitment?     

As discussed above, pre-qualification is a rough estimate of how much you can borrow.  A  pre-approval, on the other hand, provides you with a more in depth evaluation in which a lender states how much you can borrow and the rate you can borrow.  A Pre-commitment is a higher level of pre-approval, a more formal commitment and it means that the bank has sent all financial documents to underwritin and that the buyer is approved without a specific property noted.  Only a few banks do pre-commitments.

3.)   How much cash do you have for a down payment?

It’s always good to make sure that you have a sizeable down payment – although there are loans for 95% financing. Figuring this out is crucial towards determining if you can currently afford to buy a house.

4.)   How many months of reserves will you have after buying? 

            Considering reserves is also key to deciding if you can afford a house.  The amount of months of reserves you will have left will give you a good estimate.

5.)   Can you use money from your 401K?

You often can use 401k money, but it depends on your plan and your personal financial situation.  It’s a question primarily for your benefits office and a discussion to be had with your lender, accountant, and financial planner.

6.)   Can you receive a gift for the down payment?

You can in fact receive a gift to use as the down payment. Again, this needs to be discussed with the same financial team listed above.  It is always good to work with a lender who the realtor knows – a trusted partner as the realtor needs to know the nuances of the lending.  For instance, closing costs can be rolled into the loan if the original offer is made with that condition. It is very important that the lender and realtor work together to structure the offer to be reflective of the buyers finances.

7.)   Banker or Broker?

Brokers represent many banks and often have up to 40 banks to choose from so you know who has the best products and lowest rates for the buyer’s specific situation.  Bankers work for the bank and only offer their bank’s products. Brokers can help with credit repair and advise buyers on how to get their finances in order prior to buying. Bankers can’t do credit repair or shop different banks.  Credit scores determine the rate the bank will offer you.  Again, It is very important to find a realtor and a lender early in the home buying process.  A credit score that’s 20 points higher can save you thousands of dollars in interest payments over the 30 year loan period.

8.)   Does the realtor help you with determining what you can afford?      

            Yes, I can help you determnine if you have the income to buy.  I always refer my buyers to a lender immeidately as the lender looks in depth at tax returns and can pull a credit report.  If you need 6 months to raise your credit score I can educate you about the buying process and what’s available to buy so that when you’re finances are where you need them, you will be in a position to make an informed decision.  And then I will help guide you through the entire process. My primary goal is to find the right house for you at an affordable cost, and I will do everything to make sure that you get the best deal.

9.)   Determine how much you want to pay in taxes or maintenance fees 

            Taxes and maintenance fees are additional expenses that go into the cost of buying a house. Figuring out how much this will cost you is another important factor that you need to know in order to find out if you can afford buying a house.   

10) Summary

            Down payment, Income, Total monthly debt, future reserves, credit score, two years of income shown on IRS Tax filings and work history/ time at present company are factors that get evaluated when determining how much you can afford.  The realtor and lender work closely to structure offers and loans so you can buy and live comfortably in your new home for years to come.