Shopping for a new home

Key takeaways:

• First, it helps you focus your home shopping on properties that are within your reach financially.

• Second, it will help prove to sellers that you can afford to buy their home. Getting pre-approved for a mortgage makes you a more competitive home shopper, which is especially valuable in a hot housing market.

• Your goal should be to establish a mortgage budget that fits your life—one that helps you fulfill your dream of home ownership while still helping you manage your financial stress.

Shopping for a new home? While it’s tempting to jump right into online searches and open houses, smart homebuyers start the process by first figuring out how much they can afford to spend on a home.

Crunch the numbers

Determining your home budget is surprisingly easy when you use the Home Affordability Calculator from Global Credit Union. You’ll need to know:

• Annual income   

  This is your regular pre-tax income. If you have someone who will also contribute to the mortgage each month, include their income as well.
  
  

• Down payment

  This number is the lump sum you can pay today towards your home purchase. For many people, this is the biggest hurdle to buying a home, but there are many ways to save for a down payment. The old rule was that you needed to put at least 20% down, but you have a lot more options today with conventional loans as well as government-backed loans such as VA, USDA, and FHA loans. All have different requirements.
  
  If you have a conventional mortgage and can make a down payment of at least 20%, you will avoid the need to pay for private mortgage insurance (PMI), which will save you money.
  
  

• Monthly debts

  This number includes your monthly payments for things like auto loans, credit card debt, student loan payments, alimony or child support, etc. Do not count living expenses such as food, utilities, childcare, gas, health or car insurance, and similar things in this total.
  
  

• Loan terms

  The most common mortgage term is 30 years although you may want to consider a 15 or 20-year loan if you can afford to do so, because it would allow you to pay off your mortgage sooner.
  
  

• Interest rates

  Interest rates have a big impact on how much home you can afford. The rate listed in our calculator is based on national averages, so your rate may be different. While some people think they have no control over this number, this is where your credit score really matters. An excellent credit score may be able to help you qualify for a more competitive interest rate.
  
  

Good Credit Counts

Your credit score not only helps you qualify for a mortgage, but it can also impact your interest rate, loan term, and the amount of down payment required. For example, a credit score of more than 600 could drop the required down payment for an FHA loan from 10% to less than 5%.

Things to consider

Next, if you want to really make sure you’re ready for a mortgage, take a minute to plug in these numbers:

• Debt-to-income (DTI) percentage

  Add up your monthly bills and divide that number by your monthly income before taxes to calculate your DTI. A lower DTI shows that you are a lower risk to a lender. Your goal should be to have this number be 36% or less, although certain mortgage loans allow for higher DTIs, such as FHA loans (43%) and VA or USDA loans (41%).
  
  

• Other information

  If you know the property tax percentage in your area, the amount you expect to pay for home insurance, and any other annual homeownership costs such as homeowners’ association (HOA) dues, be sure to add those numbers to the calculator.

Private Mortgage Insurance

The Home Affordability Calculator also gives you the option to include the cost of PMI in your calculations. Just click "Advanced" and select to include PMI.  PMI is typically required for conventional loan borrowers who’ve made a down payment of less than 20% of the home’s purchase price. Once you have more than 20% equity in your home, talk with your mortgage lender about dropping your PMI insurance, to save money.

Once you’ve entered all the numbers, Global Credit Union’s Home Affordability Calculator will let you know the price of the home you can afford. It will also give you the monthly payment, which includes taxes, insurance, principal, and interest (and PMI if applicable).

Consider the 28% / 36% rules

Many financial experts encourage you to limit your DTI to 36%; they also recommend that you spend no more than 28% of your monthly income on housing. Doing so will leave you enough money for everything else in life, including things like food, clothing, taxes, and retirement savings.

Here’s how that works: let’s say you make $72,000 per year or $6,000 per month. This means you should limit your budget to spending $1,680 per month on housing ($6,000 x 0.28) and spend no more than $2,160 ($6,000 x 0.36) on all monthly debt payments.

If the house you’re thinking about buying would put your monthly payment above the 28% rule, or if your current DTI is higher than 36%, take a moment to rethink your next move. Do your best to reduce your debt by paying down your credit cards or other debt. Look for ways to make a higher down payment, which would reduce the monthly mortgage payment and even eliminate your need for PMI. Look at shopping for a smaller home or one in a less expensive neighborhood. Or, consider waiting for a few months until your numbers are squared away.

Get pre-approved

Once you’ve determined your budget and are ready to move ahead, work with us to get preapproved for your mortgage. Preapproval lets sellers know you’re a serious buyer, and it speeds the process once you’ve found the perfect home. A Global Credit Union home loan specialist will help you find the right type of mortgage for your situation.

The right home for you is the one you can afford

Buying a home comes with a lot of extra expenses, such as moving, new furniture or appliances, maintenance, and more. You don’t want to be ‘house rich and cash poor,’ so make sure your personal finances are solid. You’ll also sleep better at night if you have three months of expenses set aside in an emergency savings account.

Once you’ve determined what you can spend and what you can afford, it’s time to go home shopping. This is the fun part, made even better when you can walk in already pre-approved for a mortgage.

Final thoughts

Buying a home is an exciting time in life, especially when you know how much house you can afford. Welcome home!