So how do I know how much I can afford? You could ask a bank, but they'll most likely approve you for more than you really should spend. There is such a thing as house poor. Most people know someone who has a nice house but can't do anything fun and only sleep in their house because they don't have any money and work all the time.
You can also take your monthly income and find what 25% of that would be like Dave Ramsey suggests. Or, you can be like us and say, "Golley gee, mortgages suck! How much are we willing to shell out each month?" We refinanced our current home when the rates were in the 2% range and since we had been paying extra down each month, our refinanced mortgage was small. It's hard to imagine going back to a big mortgage again. Here's one of the many places you can go to estimate your mortgage.
You can also take your monthly income and find what 25% of that would be like Dave Ramsey suggests. Or, you can be like us and say, "Golley gee, mortgages suck! How much are we willing to shell out each month?" We refinanced our current home when the rates were in the 2% range and since we had been paying extra down each month, our refinanced mortgage was small. It's hard to imagine going back to a big mortgage again. Here's one of the many places you can go to estimate your mortgage.
Before I go any further, I want to give you a piece of advice that I wish someone had given us. First, if you currently own a home, do NOT make extra payments on the house if you think you are going to move! You need to have money for a down payment. We missed out on a few homes that might have been perfect early on in the search because we didn't realize that saving for a down payment would be better for us than paying down principle on our current mortgage. Money talks when buying a home; make sure you have plenty of it in reserve.
Also, many traditional banks will not finance anything over 10 acres. If you are purchasing more than 10 acres, you will most likely have to pay that out of pocket. YOU HAVE BEEN WARNED. If you go for more of an ag type loan through a co-op so you can finance a large parcel, you may find that you will need a larger down payment (up to 50% depending on the type of loan, your credit, etc.). This is also true of buying land which I'll cover in another post.
Also, many traditional banks will not finance anything over 10 acres. If you are purchasing more than 10 acres, you will most likely have to pay that out of pocket. YOU HAVE BEEN WARNED. If you go for more of an ag type loan through a co-op so you can finance a large parcel, you may find that you will need a larger down payment (up to 50% depending on the type of loan, your credit, etc.). This is also true of buying land which I'll cover in another post.
Now, when you are considering your monthly payment, don't forget that unless you purchase your home with cash, you will be required to have home owners' insurance and you'll have to pay property taxes, unless you live in a state that as my hubby says "doesn't charge you a rent fee to live on your own land" (no property taxes). Most likely an escrow account will be set up by your lender so that each month an estimated portion of your payments is actually being reserved to pay taxes and insurance for you; meaning you never personally write the check. You pay the bank each month and they make sure the tax and insurance bills are paid on time. Usually this is non-negotiable. That's fair enough. If someone is lending the money, they want to make sure that their investment is protected.
Plan to have 20% of the total mortgage ready to be paid at closing as a down payment. Zero down mortgages or mortgages that allow less of a down payment really aren't the best options. You'll may end up with a higher interest rate, and you don't want to have to pay PMI. (Private Mortgage Insurance-You can't afford the down payment, so they can't trust you; you need to pay them for the privilege of taking a risk on you. You will never get this money back, and it doesn't apply to the principle. What. A. Waste.) Even though some loans may not make you put any money down, you almost always pay for it in additional closing costs and fees. What you don't pay for in closing costs, you pay for in purchasing freedoms. For example, if you are buying a home in the country, you may qualify for an USDA loan. While it offers more buying support, ultimately it can limit the condition of home and/or property you can buy. VA loans for example may not let you have dilapidated out buildings. Again, they are thinking if you don't have the money for a down payment, you aren't going to have money to fix the house or property so you don't need that extra burden.
You'll also need to decided how long of a term do you want your loan to be. While some people say only do a 15 year mortgage, I think it depends on your situation. Sure a 15 year mortgage will probably give you a better rate (and that does matter), but if you are cautious like me, don't sweat it. Do the 30 year mortgage, but pay an extra payment specifically towards the principle or put an extra payment worth of cash into your savings account-and don't spend it! Even if you don't use it as a down payment, in a few years you can pay off your mortgage early.
There are also 20 year mortgages, and some banks let you customize the mortgage. We wanted to make sure that if we did go down to one paycheck, for whatever reason, the mortgage wouldn't be more than 25% of one of our paychecks when we bought this home. When we went to refinance, because we'd been putting extra down for a few years, we refinanced to a 15 year mortgage and were paying hundreds less per month! We're now paying 2% less than our previous mortgage after the refinance. Lower rates and paying extra can make a huge difference. So don't think that just because you have a mortgage you are done.
There are also 20 year mortgages, and some banks let you customize the mortgage. We wanted to make sure that if we did go down to one paycheck, for whatever reason, the mortgage wouldn't be more than 25% of one of our paychecks when we bought this home. When we went to refinance, because we'd been putting extra down for a few years, we refinanced to a 15 year mortgage and were paying hundreds less per month! We're now paying 2% less than our previous mortgage after the refinance. Lower rates and paying extra can make a huge difference. So don't think that just because you have a mortgage you are done.
Once you've decided on how much you want to spend, the term, and have a down payment ready figure out who your want your lender to be. If they don't respond to your emails, phone calls, or questions promptly, you don't want to use them! You may get in a bidding war or have issues with a house inspection and need to cancel the mortgage before you are locked in. If they don't promptly respond it could cost you a house or a huge amount of money. Look at their terms (i.e. can I pay it off early without penalty) and rates.
Then get a pre-approval letter. Be prepared to provide a lot of personal information including banking info, pay stubs, tax returns, and other lender specific items before you can get that highly sought after pre-approval letter. Usually, you need one of those before you can make an offer on a home, but sometimes properties even require a pre approval letter before you can view them. If you are serious about buying a home, you need this magic pre-approval letter so that when you do find the home of your dreams, you can put that offer in ASAP.
Then get a pre-approval letter. Be prepared to provide a lot of personal information including banking info, pay stubs, tax returns, and other lender specific items before you can get that highly sought after pre-approval letter. Usually, you need one of those before you can make an offer on a home, but sometimes properties even require a pre approval letter before you can view them. If you are serious about buying a home, you need this magic pre-approval letter so that when you do find the home of your dreams, you can put that offer in ASAP.
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