Learn from Lynette! In the video, she explains how she spent all of her savings on her down payment and closing costs, and failed to set money aside for emergencies. Before purchasing your home, it's important to get a full picture of your financial situation. Asking the questions below is a good place to start.
- What is your annual gross income? You can get a very rough estimate on how much home you can afford by multiplying your annual gross income by 2.5. For example, if your annual gross income is $50,000, you may be able to afford a home worth $125,000 (this varies depending on current interest rates, your debt, and credit history).
- What is your credit score? Your credit score is a key factor that lenders use when determining if you qualify for a mortgage loan. Because of its prominent role in the homebuying process, it's important you understand how it's compiled, how to obtain your credit report, and how to build your credit. Generally, a higher score can mean a better chance of getting approved for a loan and securing a lower interest rate.
- How much have you saved for a down payment and other costs? You have choices when it comes to your down payment, even the possibility of putting as little as 3% down. Work with your lender to understand what option is best for you. Once you get a mortgage, you'll also need to pay closing costs that include an appraisal fee, credit report fee, tax services fee, government recording charges, and your lender's origination fee. Typically, these range from 2-5% of your purchase price. Learn more about these expenses here.
- How much do you spend each month? Knowing how much you spend on your day-to-day living expenses is an important factor in determining how much home you can afford. When accounting for your monthly spending be sure to factor in any debts you have (car, tuition, credit card), along with food and extracurricular activities.
- What is your financial cushion? Like Lynette, you may have the money for a down payment and closing costs, but you'll also need financial reserves for life's unexpected emergencies. Setting aside money in your budget for the unplanned will help you remain financially secure when or if emergency expenses come up.
Visit My Home by Freddie Mac® for more information on the homebuying process and be sure to follow our Spring Homebuying blog series.