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How much new home can you afford?


You know that you should be pre-approved for a mortgage before shopping for a new home, but what exactly should you do?

Some people fill out those quick, pre-approval forms online, but many of them are merely guesses, not actual qualifiers. When you’re serious about your home search, start with an actual mortgage pre-approval so you know how much new home you can afford.

A lender evaluates your debt-to-income ratio. That’s a comparison of your total debt (cost of living, credit cards, loans) to your gross household income. If the DTI ratio is too high (e.g., 45% or more), you might not be able to afford a mortgage, or at least not as much of a mortgage as you hoped.

The other factor that contributes to your mortgage pre-approval is your credit rating (also known as FICO score). While the DTI demonstrates your financial status, your credit score shows how you manage debt, so the combination of the two measurements adds up to major influence on your loan approval.

Conventional loans generally look for a credit score of 680 or higher, but if your FICO score is lower, don’t fret. There are other options for securing a mortgage:

·         FHA (Federal Housing Administration). This federally insured loan is designed to assist first-time homebuyers and people with less-than-stellar credit ratings (e.g., 580 or above, depending on the lender). The loan requires only 3.5% down, if you qualify. Underwriting can be a detailed process, but it’s worth all the documentation to secure a mortgage!

·         VA (Veterans Affairs). The U.S. Department of Veterans Affairs offers this loan to active and retired military personnel. The mortgage requires no downpayment, no mortgage insurance payment, and a competitive interest rate. Lenders that are approved to provide VA loans set their own credit score requirements, so if your FICO is below 620, shop around for a lender who will work with you.

Cash to close

In addition to the pre-approval for your mortgage amount (which includes property taxes, homeowner’s insurance, and HOA fee, if applicable), be prepared to pay closing costs. The amount will vary, according to your mortgage and the purchase price of the home. You can estimate 2% to 5% for a conventional loan and 3% to 6% for FHA. Talk to your lender to get a more accurate figure, so you can be prepared to bring the cash required to close on your home.

Securing pre-approval from a qualified lender gives you confidence to shop for your new home, knowing how much new home you can afford.

If you’re looking for a low-maintenance, high-quality home, consider one of the many Epcon Communities in 18 states around the U.S. One of our preferred lenders can help you with the pre-approval process so you can count on a smooth, timely closing!