Why do credit scores matter?
Generally, the higher the credit score you have, the lower the interest rate you’ll qualify for and improve overall what you can afford in a home. Even lowering your interest rate by half a percent can save you thousands of dollars and increase your affordability range significantly.
What is the difference between APR vs interest rate?
Mortgage Interest Rate
The mortgage interest rate is the amount charged by a lender in exchange for loaning money to a buyer. It is expressed as a yearly percentage of the total loan amount but is calculated into the monthly mortgage payment.
Annual Percentage Rate (APR)
APR (%) is a number designed to help you evaluate the total cost of a mortgage. In addition to the interest rate, it takes into account the fees, rebates, and other costs you may encounter over the life of the loan. The APR is calculated according to federal requirements and is required by law to be stated in all home mortgage estimates. This allows you to better compare how much mortgage you can afford from different lenders and to see which is the right one for you.
What is property tax?
As a homeowner, you’ll pay property tax either twice a year or as part of your monthly home payment. This tax is a percentage of a home’s assessed value and varies by area. For example, a $500,000 home in San Francisco, taxed at a rate of 1.159%, translates to a payment of $5,795 annually.
It’s important to consider taxes when deciding how much house you can afford. When you buy a home, you will typically have to pay some property tax back to the seller, as part of closing costs. Because property tax is calculated on the home’s assessed value, the amount typically can change drastically once a home is sold, depending on how much the value of the home has increased or decreased.
How much is homeowners insurance and what does it cover?
Homeowners insurance is a combination of two types of coverage:
- Property insurance: protects homeowners from a variety of potential threats such as weather-related damages, vandalism, and theft.
- Liability insurance: protects homeowners from lawsuits or claims filed by third parties for accidents that happen within the home.
In 2019, the average annual cost of homeowners insurance was $1,083 nationwide. The cost of homeowners insurance policy will vary depending on the type of property being insured (e.g. condominium, mobile home, single-family residence, etc.) and the amount of coverage the owner desires. Lenders require that buyers obtain homeowners insurance in order for the insurance premium to be included in the monthly mortgage payment.
What is Private Mortgage Insurance (PMI)?
Mortgage insurance protects the mortgage lender against loss if a borrower defaults on a loan. Private mortgage insurance (PMI) is required for borrowers of conventional loans with a down payment of less than 20%.
PMI typically costs between .05% to 1% of the entire loan amount. If you buy a $200,000 house, your private mortgage insurance will cost roughly $2,000 annually or $14,000 over the course of seven years.
Deciding whether or not PMI is right for you depends on a few different factors. Although PMI raises your monthly payment, it may allow you to purchase a home sooner, which means you can begin earning equity. It’s important to speak to your lender about the terms of your PMI before making a final decision.
What is a jumbo loan?
A jumbo loan is used when the mortgage exceeds the limit for Fannie Mae and Freddie Mac, the government-sponsored enterprises that buy loans from banks. Jumbo loans can be beneficial for buyers looking to finance luxury homes or homes in areas with higher median sale prices. However, interest rates on jumbo loans are much higher because lenders don't have the assurance that Fannie or Freddie will guarantee the purchase of the loans.
Documents needed for mortgage application
Here are a few documents you should gather to help you understand your financial situation and how much house you can afford. This information will also be required when you apply for a pre-approved home loan.
- Recent statements from all bank and investment accounts
- Pay stubs and W-2 income tax forms
- Total monthly expenses, including all bills, groceries, clothing budgets, etc.
- All of your assets, including stocks, 401(k), IRAs, bonds, cash, rental properties, etc.
- All debt including credit cards, student loans, car loans, mortgages, etc.
- Credit score
- Profit and loss statements if you are self-employed
- Gift letters if you are using a gift to help with your down payment