4 Numbers That Determine Your Buying Power

Dated: May 24 2017

Views: 367


If you're serious about buying a home, understanding your finances is a crucial first step.

When deciding to purchase a home, the list of things to consider can be daunting. While you might be comparing square footage, finishes, and neighborhoods, mortgage lenders are looking at specific numbers that make up your financial picture with the same discerning eye.


Image title



You might be eager to look at homes online, or even swing by a few open houses, but without getting your finances in check, your offer could be the last to the table. Sitting down with a lender and getting pre-approved for a loan puts you in a strong position and will make your offer stand out on that home for sale in Denver, CO.

Evaluating your buying power isn’t the most exciting part of the home-buying process, but understanding how these numbers affect the chances of an offer being accepted is crucial for every prospective buyer.



Credit score


Your credit score is one of the most basic ways a lender can determine your ability to pay your loan on time every month. Five key factors influence your score, each varying in importance: payment history (35%), amounts owed (30%), length of credit history (15%), credit mix (10%), and new credit (10%).

While a low credit score (think below 620) doesn’t necessarily mean you’ll be denied for a loan, it certainly impacts the quality of loan you’re offered. Interest rates for scores in the 580 to 699 range could be anywhere from 0.5% to 4% higher than the lowest rate available — and that will make your mortgage more expensive.

On the other hand, a score of 760 to 850 could land you the best possible rate, and a score of 700 to 760 could put you just 0.25% above the lowest rate.



Down payment


Credit scores are playing a larger role, but cash is still king in the home-buying game. Regardless of how low your mortgage rate is, the ability to offer a serious down payment improves your overall buying power the most.

There are plenty of benefits to the often-repeated 20% rule of thumb, in which you come up with 20% of the home sale price in cash. Putting this much money (or more) into a down payment can eliminate the need for private mortgage insurance (PMI), and allow you to negotiate for a lower interest rate, and, in competitive markets, could place you above the competition.

For sellers, it all boils down to looking committed and financially ready to make such a hefty purchase. In turn, your high down payment could significantly lower the amount you pay over the life of your loan.



Debt-to-income ratio


Making a nice, steady income is great, but not everything when it comes to determining your mortgage eligibility.

Lenders want reassurance that you’ll be able to pay your mortgage in addition to all other outstanding debts currently in your name. To do this, they will look first at your front-end ratio, or housing ratio — your monthly housing payment (including insurance, interest, taxes, and PMI, if applicable) divided by your monthly income. The general rule of thumb is to keep this at or below 28%.

Next, lenders will consider your back-end ratio or debt-to-income ratio, a calculation that determines how much of your monthly pay services your existing debt (e.g., car loans, student loans, credit card payments, etc.). This calculation is your total monthly debt payments divided by your total monthly household income. The general rule of thumb for this calculation is to keep it at or below 36%.

While landing above the suggested ratios won’t necessarily end your journey to homeownership, it can certainly impact your loan terms.


Assets


A lender’s biggest concern is always whether the borrower will have the income coming in and the financial resources already on hand to stay up to date on payments, regardless of other financial storms they may be weathering.

Therefore, you will be required to provide documentation of assets showing where money for the down payment is coming from and what your savings and investments currently look like. The bigger your cushion, the more likely lenders will think you can afford all mortgage costs and fees, and all other home-related financial obligations afterward.


The bottom line


Understanding the importance of these four numbers and making necessary adjustments before window-shopping can do wonders in ensuring your bank account will be ready when the time comes to make a purchase.


Source


Blog author image

Mark Ross

For Mark Ross, founder of Ross NW Real Estate and professional real estate broker, real estate has always been the career of choice. During his 30 years in the industry, Mark has gained experience in ....

Latest Blog Posts

Does My Real Estate Agent Get Paid If I Dont Buy A House

If you’re a first-time homebuyer (or a longtime homeowner) out there searching for your new home, you may spend quite a lot of time touring houses with your real estate agent.But what happens if

Read More

Mortgage Rates And Home Prices Will Rise In 2022

Economists at Fannie Mae expect an increase in mortgage rates and home prices in 2022 due to higher inflation, a tightening of monetary policy, and low home inventory.Fannie Mae in its October

Read More

Homebuilders Are Growing Concerned About Affordability

Homebuilder confidence continued to rise in October despite increasing affordability issues due to rising material prices and ongoing shortages, according to the latest National Association of Home

Read More

How To Evict A Family Member Or Friend With No Lease

Thinking about evicting a family member with no lease? If you’re feeling more than a bit guilty over the prospect—well, don’t be so hard on yourself: You have plenty of company on this one

Read More