See How Much You Can Afford ↓
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Monthly Debt and Obligations Should Include:
Determining how much you can afford to spend on an Indianapolis home depends on a couple different variables, but doesn’t take long to figure out. Once you determine how much you can afford, you’ll be much better off looking for your dream home. Often times Indianapolis home buyers make the mistake of searching for new homes without having the slightest idea as to how much they can afford. Without knowing how much you can afford to spend on a home will leave you frustrated from wasted time and expectations not met.
Possibly the biggest key factor when determining how much you can afford is your debt-to-income ratio (DTI). Indianapolis mortgage lenders use this ratio to gauge how much more debt you can handle, and what the lenders will offer. Debt is not just credit cards and student loans. It also includes child support, car loans, and housing expenses. In the past, financial lenders generally used a ratio of 35% and below to gauge if a loan was risky, but because lenders have tightened their standards, regulations and guidelines for this ratio may have changed.
Income & Available Cash
Lenders look at the availability of both these items when qualifying an Indianapolis home buyer for financing. Most borrowers have more limitations in the amount that they can spend on a house because of issues meeting the cash requirements, instead of the income requirements. Cash is needed when buying an Indianapolis home to meet the down payment, closing costs, title insurance, escrows, and a variety of other charges. The amount of cash needed for a down payment will be higher if the mortgage lender views the loan made to you as a risky investment.
Right now mortgage rates are at the lowest level they’ve ever been. Even though mortgage lenders have tightened their standards, I encourage you to shop around and compare mortgage rates from different lenders. Now is the time to get locked into a fixed-mortgage rate. Even a small difference in percentage can end up costing/saving you $500 a year.
Financial lenders can exploit borrowers because most of the time borrowers aren’t as knowledgeable about the borrowing process as they need to be. Banks make their money by people borrowing from them and then paying interest back over time. Though applying for a loan can be an intimidating and stressful situation, borrowers have more power than they often realize. Don’t be afraid to negotiate hard with your lender. Search around and see what all the lenders are charging. Just because they have the lowest interest rates, doesn’t mean they’re the one you should choose. Know exactly where you’re money is going.
For some Indianapolis home buyers, the first hurdle to overcome in the home buying process is the initial down payment. The amount of the down payment will depend on which type of mortgage loan you go with. You may hear lenders prefer if you “have some skin in the game.” This just means that lenders would feel more comfortable lending to someone who has something at stake, as opposed to someone who is going off other people’s money.
If you’re qualifying for 100% financing, your down payment will be zero. Minimum FHA down payments are currently 3.5% of sales price. Although this may be enticing at first, FHA usually makes their money back with higher fees. With traditional conventional loans, down payments can range from 5-20% of the sales price. It’s important to know that any loan that is more than 80% of the sales price, private mortgage insurance (PMI) will be involved that will increase your monthly mortgage payments.
Fortunately, there are some sources that you can access in order to make your down payment. Make sure you speak with a tax professional before you start taking funds from these accounts. The accounts are: personal savings, gift from relatives, IRA, 401K plans, Roth IRA, Mutual funds, bonds, and securities.
There are a number of fees that must be paid when completing a real estate transaction. These closing costs include points, taxes, title insurance, and agent commissions, which typically range between 2-5% of the purchase price. These costs are often overlooked so it is important to make sure you budget these in once you know what a lender is willing to loan you.
Your credit report will show whether you have a track record of paying your bills on time. The three main credit reporting agencies are Experian, Equifax, and TransUnion, and can order your credit history from any of them. Make sure you read the rules and steps carefully. If your credit score is struggling there are various ways to boost your score so make sure to look into this if you need.