Buying a Home
Determining How Much You Can Afford
The best way to get a low interest rate and to avoid a default later is to not borrow more than you can afford. These are things to consider:
Calculate Your Debt-to-Income Ratio
The general rule of thumb is that your mortgage payment should equal no more than 28 to 33 percent gross income and total debt (i.e. anticipated amount plus car loan, credit card balances, etc.) should not surpass 36% income.
Determine Your Down Payment
The larger the down payment, lower your monthly payments will be and less you'll ultimately pay in finance charges.
Here are some tips to help you make the most of your money and increase your borrowing power:
Don’t Deplete Your Savings
Lenders often look at your cash reserves. They don’t want you to empty your savings accounts in order to afford your mortgage payments. So avoid making other major purchases in the year you plan to buy.
Borrow with a Cosigner
You may be able to borrow a larger amount or get a lower interest rate if you borrow with a cosigner. Consider this option carefully. You will both be held responsible if you default on the loan.
Track the Current Housing Market
Look at the current buyers' market and interest rates. Are rates increasing or decreasing? The lower the interest rate, the more home you can afford.
Patch Up Bad Credit
Get a copy of your credit report from each of the three credit bureaus. Make sure that there are no mistakes on it that could cost you a higher rate or even prevent you from getting financing. Pay all of your creditors in full and on time for at least a year before you want to get a mortgage loan. And try to avoid changing employers. The better your credit rating, the more you’ll be able to borrow and at a better interest rate.
The Three Credit Bureaus:
- ExperianOpens in New Window (888) 397-3742
- EquifaxOpens in New Window (800) 685-1111
- TransUnionOpens in New Window (800) 916-8800