Top Questions To Ask Your Mortgage Lender About Affordability, Answered
Carey Chesney9-Minute Read
November 06, 2020
So you’ve decided to invest in your first home. Congrats! As one of the biggest financial undertakings you’ll take on, you no doubt have questions. A TON of questions. More specifically, it’s a safe bet that a bunch of them are mortgage questions. Terms like PMI, fixed rate, mortgage insurance, closing costs and credit score are likely floating around in your head. It can be dizzying. Well fear not, we have answers.
6 Mortgage Affordability FAQs You Can Ask Your Lender
One of the toughest parts about starting any new process, especially buying a home, is knowing what questions to ask. You’re not a mortgage expert, so lean on your lender for answers to the critical questions that will help you make the best financial decision possible. Let’s take a look at some of the key questions you should start with.
1. What Are My First Steps Towards Determining My Housing Budget?
Step one, figure out the finances and get a mortgage preapproval.
I know, it’s way less fun, but getting your financial ducks in a row will make it easier to get the house you want once you find it. During the mortgage preapproval process, the mortgage lender will let you know how much money they might be willing to lend you, pending an appraisal to verify the property value.
Although it might be tempting to accept their approval amount as a budget for your home buying process, you need to dig deeper. Instead of just looking at the amount you qualify for, you’ll need to look at your current expenses. It's entirely possible that you’ll qualify for more than you can actually afford based on your budget. If the monthly payment your lender has calculated for you makes you a little uncomfortable, consider lowering your budget.
While factors like the principal and interest of the loan are clear in terms of monthly expenses, there are other things to consider. For example, it’s a good idea to budget about the equivalent of 1 month’s payment yearly for home maintenance. And what about the fun stuff? If your monthly payment stretches your family budget to the limit, how are you ever going to be able to afford to put in that hot tub you’ve been wanting?
Bottom line, it's important to not overstretch your budget with an oversized mortgage. After all, you want to be comfortable in your own home, which includes being comfortable with your budget.
2. How Do I Figure Out How Much House Can I Afford?
The first thing you’ll need to consider is how much money you’re earning each month.
Don’t just look at your pretax salary, find out what you’re earning after taxes to base your calculations. After all, that's the actual money you have to spend. Next, take a look at your current financial obligations. List all of your monthly expenses, from credit cards to TV and internet to home heating and cooling costs to groceries and everything in between.
Once you have a comprehensive list, you can subtract your financial obligations from your monthly income to determine how much you can technically afford to spend on a monthly mortgage payment. However, you should also consider other factors.
Think about your other savings goals such as any renovations to your new space or an upcoming vacation. Plus, leave some extra room in your budget to allow for any minor financial emergencies that will inevitably pop up. Life happens and you want to be financially ready when it does.
Your lender can help with this process as well by providing cost breakdowns that will help you navigate the impact buying a home will have on your monthly budget.
3. How Much Do I Qualify For?
The next step is understanding how much you qualify for. A mortgage lender will determine this based on your current financial situation by reviewing your assets, income and current debts.
In addition, an appraisal will be done to verify the property’s value because lenders don’t want to lend you more than a house is worth. Makes sense, right?
Specifically, the mortgage company will want to know what your debt-to-income ratio is because it lets the lender know how much debt you’re carrying each month. Generally, a mortgage lender will want to see a debt-to-loan ratio, or DTI, below 43%. However, the lower your DTI, the better. You may be able to qualify for certain programs with a higher DTI, but your mortgage options will be more limited.
In addition to your current financial picture, a lender will take your credit score into account. If you have a good credit score, you can expect to qualify for more than someone who has a lower credit score. However, there are still lenders that are willing to work with borrowers who have bad credit.
Bottom line, there are likely a number of options out there no matter what your credit or monthly budget looks like. But the better these factors look, the more options you will have to choose from.
4. What Will My Closing Costs Look Like?
Asking your lender about closing costs is another important step toward understanding the financial commitment you’re making when buying a home. There are a number of factors that go into closing costs, including loan origination fees, discount points, appraisal fees, title searches, title insurance, surveys, taxes, deed-recording fees and credit report charges, just to name a few.
Have your lender take you through the whole process and what fees you can expect at closing so you don't get surprised when you’re getting the keys to your new house on closing day.
5. What is the Best Length of Time for a Mortgage?
Like houses, mortgages come in all shapes and sizes, with the most common ones lasting for 15 or 30 years. Ask your lender about the pros and cons of a 15-year vs. a 30-year mortgage to find out which option is best for you.
6. What Should I Avoid Doing During the Mortgage Approval Process?
Knowing the right moves to make is incredibly important to facilitate a smooth home buying and mortgage approval process. What’s maybe even more important? Avoiding the wrong moves. Talk to your lender about what financial decisions should and should not be made while the mortgage approval process is underway.
Some common pitfalls to avoid are making large purchases, quitting or switching jobs, taking on additional debts or missing payments that could impact your credit score.
Sorry to say, that means you’re going to want to hold off on buying that brand new speedboat until you close on the house.
Mortgage Affordability Questions Only You Can Answer
Even with the help of competent experts like lenders and real estate agents, some questions can only be accurately answered on our own. Let’s take a look at some of the home buying and lending frequently asked questions where the only real expert to consult is yourself.
1. How Much Should I Spend On A House?
At the end of the day, it’s really your call and your call alone. It’s important to know that the number you come up with can be different from both what you're qualified for and what you can technically afford.
It’s easy to get caught up in the excitement of house-hunting with a huge preapproval in hand. Like, really easy. Don’t do it. Talk with the key personal connections involved in the sale like your partner or other family members and decide based on what will make you feel the most comfortable once the dust settles and you’re in your new home looking over the bills for the month.
Not finding your dream home in your dream budget? Consider a starter home. This can be your “right for the moment” home that can lead to the monthly saving and appreciating home value needed to get that dream home in the future.
Need some more specific guidance? Consider the “25% rule,” which suggests not spending more than 25% of your post-tax income on a mortgage, and saving for a 20% down payment before you make a move.
2. Is More House Better Than Less House?
That depends on how you feel about the home. We’ve been discussing buying a home in terms of the financial investment you make but we all know it’s so much more than that.
The emotional side of things can be an even bigger undertaking. After all, this is where you and your family will be spending most of your time as you turn a house into a true home. Only you can envision being in the home, living there day after day, and how that will make you feel.
The housing market heats up and cools down both seasonally and year over year, so it’s not always possible to sell a home quickly when monthly expenses become too much or it’s just not the right fit. Make sure you can see yourself living in it, not necessarily forever, but at least for a few years.
If you are leaning toward more of a starter home than a forever home, keep in mind that it can be rented out to produce income when you’re ready to find that dream home.
3. Should I Continue Renting While I Save For My Dream Home?
At the end of the day, renting is an expense, but mortgage payments build up equity. Every situation is different, but in most cases, it makes more sense to buy than rent if you can swing it. Even if you know you’re just buying a temporary starter home, it can increase in value, build equity, and even become your first investment property.
A rent vs. buy calculator can help you look at your specific situation to help determine which might be right for you.
4. What If I’m Nowhere Near A 20% Down Payment?
Fear not, there are many options still available if you haven’t saved up enough to put 20% toward your down payment. You can get a conventional loan with a down payment as low as 3%. Federal Housing Administration (FHA) loans only require 3.5% down payment. Some loan types, like USDA or VA loans, don’t even require a down payment, although there are more stipulations on who qualifies for those options.
5. When is the Right Time to Buy?
The right time to buy is when you’re ready. That might seem simple, but understanding if you’re really ready financially and emotionally can be tricky.
Family considerations like whether kids need to change schools or if you need to be close to aging parents are just a couple examples of things to consider. Real estate agents can tell you how the housing market is trending and lenders can tell you what you can afford, but the only person who really knows when you’re ready is you.
Don’t Take On More Than You Can Handle
It’s been said a few times already but it’s worth repeating: As you consider buying a home, it’s critically important to only buy one you can afford. Sure, it can be tempting to spring for the HGTV-perfect home, but that may not work for your current budget or long-term financial goals.
Home buying should take into account all of your future plans, not just where you’re going to live. This might include saving for retirement or a trip around the world. No matter what your goals are, it's important to have the funds you need on hand.
If you're throwing every dime you have into a mortgage, it can be difficult to fund your other dreams. Remember, you're committing yourself to make this payment a long time – like 30 years! Make sure you leave some wiggle room in case life throws some unexpected curve balls your way. It always does.
The Bottom Line
Purchasing a home is a big step, financially and emotionally. Make sure to consider all your financial obligations and goals before you move forward. If you aren’t sure you can afford a large mortgage, consider a starter home.
Not sure about what to put as a down payment? Consult your lender.
Wondering if the home you have is ready to sell? Talk to a real estate agent.
Lean on the professionals but trust your gut and only move forward when you feel the time is right. After all, the most important thing is that you’re comfortable in your new home. If you aren’t sure that you’re getting a good deal and can afford the monthly payments, it will be difficult to settle in.
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