Before you dive in and place an offer on a house there are dozens of questions that need to be answered. But to make sure you’re financially ready, here are three big picture questions you should be able to answer.
1) What’s my credit score?
Your credit score plays an important role in qualifying for a mortgage loan. Loan officers use your credit score to help determine the interest rate you’ll be paying on your loan. Generally, the higher your credit score, the lower your interest rate will be, with the lowest rates going to home buyers with 740-plus credit scores. A lower interest rate means you’ll pay less money over the course of your mortgage.
Want to know your credit score before applying for a mortgage? Contact your local Heritage loan officer. We’ll talk to you about your credit score and how you can take steps to get ready to apply for a mortgage. We’ll even get you pre-approved if you’re ready to start house shopping.
2) How much do I have for a down payment?
A down payment is the percentage of a home’s purchase price that you pay immediately when you close on your mortgage. Your down payment can determine how much house you can afford, when you’re ready to apply for a mortgage:
- Typically, if you don’t put down 20% or more, you’ll have to pay private mortgage insurance (PMI), which increases your monthly payment
- The amount of your down payment can determine the interest rate your lender offers you—often a higher down payment means you may be offered a lower interest rate
Your down payment allows the lender to calculate your loan-to-value ratio (LTV). Your LTV is the ratio between your loan amount and the value of your home:
LTV = Loan Amount / Purchase Price or Appraisal Value (lower of the two)
For example, if you bought a home valued at $180,000 with a down payment of $30,000, your LTV would be 83% ($150,000 / $180,000 = 83%). Your LTV, along with your credit score and other factors, is used by lenders to determine how much credit to offer you.
3) How much house can I afford?
Here’s the big question… how much home can you afford? At the end of the day, your answer should depend on what you’re comfortable paying each month for your mortgage, homeowners insurance, taxes and additional housing costs. To get an idea of what you can afford on a mortgage payment, try using our Home Affordability Calculator.
As a general rule, your monthly housing payment (principal, interest, taxes and insurance) should not be more than 28 percent of your pre-tax income. Our loan officers can help you calculate this figure and discuss what a comfortable housing payment would be for you, based on your budget.
Ready to start house shopping?
Before you begin house shopping, it’s best to know what you can afford, make sure your finances are in line and even get pre-approved so you are ready to place an offer. To get started, contact one of our loan officers or call your local Heritage branch.