When purchasing a new home, it is common to hear a lot of discussion about buying power. Sometimes, however, it might be unclear exactly what this means. Buying power is essentially how much you are able to invest in your home, and it is determined by three factors: income, credit, and assets. Before embarking on the home-buying journey, these three factors should be evaluated to gain a better understanding of your buying power.
An understanding of the relationship between income and maximum possible housing payment is vital to the process of purchasing a home.
When examining income, it is important to consider the types and sources of income that will impact your buying power. Typically, income is W-2 based or self-employed. However, it may also include: overtime, bonuses and commissions; part time-jobs and secondary income; social security and pensions; dividends and interest; alimony and child support; and veteran’s benefits. Any of these can be included when considering overall income to provide a clearer picture of where you are starting. When evaluating these numbers for a loan, we recommend that you have your most recent two year’s W-2s, paystubs for the last 30 days, and last two months of bank statements, as well as any stock, mutual fund, or IRA/401k account statements
Keeping this number in mind from the beginning of the process can help ensure you are considering homes within your budget, saving you valuable time in the search for your new home, and eliminating potentially stressful situations along the way. We also provide resources on our website that can assist you in determining your buying power based on your preferred monthly payment, down payment and loan terms.
When evaluating your buying power, your credit is one of the first and most important factors to consider. Whether you have an extensive credit history or little to no credit history, the home buying process can be greatly impacted by these numbers. Remember that your score is a number based on statistical analysis of your credit history and used by lenders, and others, to predict if you will pay your debts and determine what credit to extend to you.
When evaluating credit, payment history and length of credit make up 45 percent of your score when combined. If you have had not had credit for very long, or if you are close to your credit limits, it may not place you in a favorable position in a credit evaluation. The other parts of your score are reliant on credit use, credit types, and new credit. This means that having a combination of revolving and installment debt can improve your score, and credit bureaus will take into account any recently opened accounts and the number of inquiries. Consistency is also vital when evaluating credit, so any recent late payments will reflect poorly on your chances of getting favorable mortgage terms.
For those with little or even no credit history, documents proving alternative credit history will be required. These may include a 12-month history of utility bills, rental payments, or auto insurance payments. The home you can afford depends greatly on your debt-to-income ratio, so a credit evaluation should be prioritized when beginning your home buying journey.
Assets are the amount you have set aside to make the necessary payments when buying a home, from closing costs to monthly mortgage costs. These may include savings, certificates of deposit, stocks, mutual funds, or gifts from relatives. Taking all of your assets into account when looking to purchase a home provides you with the knowledge of exactly what you might be able to afford.
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