Your Buying Power
An often-quoted rule says you can afford a house that costs up to two and one-half times your annual gross income.
If you are buying a house with someone else (spouse maybe?) you can consider your co-purchaser’s annual gross income in deciding how expensive a home you can buy. (Your spouse’s debts and credit history also will determine how much you can borrow. The co-purchaser is also liable for repayment of the mortgage.)
According to this guideline:
if (together) you have an annual income totaling $80,000, you should expect to buy a home priced at no more than $200,000; if you have a joint income of $40,000, your new home should cost no more than $100,000.
Your buying power ultimately depends on three things:
- How much you have available for the down payment;
- How much a financial institution will agree to lend you; and
- Your credit situation
Your Down Payment
If you are a first-time homebuyer, the price you can afford to pay for a house may be limited by the required down payment and closing costs. Unlike homeowners who can rely on their equity in a property they already own, your savings are probably your principal resource. If you haven’t accumulated much savings, you may need to set aside funds for a down payment on a regular basis from your paycheck.
Your Borrowing Power
Apart from your down payment, the other major factor limiting how expensive a home you can buy will be how much you can borrow. When you apply for a mortgage, the lender will primarily consider three factors in determining how large a loan to grant you:
- Earnings;
- Existing debt level; and
- Credit (payment) history.
The Qualification Process
When you apply for a mortgage, we will use all the relevant data — your income, your existing debts, the purchase price of the house, your down payment, the interest rate on the loan, and the cost of property taxes and insurance. CrossCountry will quickly calculate whether you qualify for the amount you need to buy the house.
Qualifying for a loan is only the first step in being approved. The qualification process determines how large a mortgage you are eligible for if your loan application is approved.
Establishing a credit record
If you have no credit record either good or bad, now is the time to establish one. If you do not have a traditional credit record that shows payments made on credit card purchases, a car loan, or student loan, it is still possible to establish a credit history. For example, you can build a nontraditional credit history by documenting your monthly rent payments to previous landlords; utility companies for electricity, gas, water, and telephone services; cable television companies; or insurance companies for medical, automobile, and life insurance.
Repairing a bad credit record
You also may find that your credit record is not as clean as you might wish. If you are currently having credit problems, you may not be able to buy a house until they are resolved. If your problems are in the past, your recent track record of timely debt payment may help. By law, most unfavorable credit information must be dropped from your credit file after seven years. A bankruptcy remains on your credit report for 10 years.