4 Numbers That Determine Your Buying Power

Buying a house is a lengthy process, and there is a list of things to consider before signing your name for the last time. While you are sizing up the house, mortgage lenders are looking at a few specific numbers that could paint another financial picture for you. You will want to have a sense of how you stand in these four areas before you even begin your house hunt.

Credit Score

This score is the most basic way lenders analyze you, looking at your creditworthiness, which is your ability to pay back your loan each month. Five factors determine your credit score, with each having its own importance. Here’s how it breaks down: payment history (35%), amounts owed (30%), length of credit history (15%), credit mix (10%), and new credit (10%).

Having a low credit score doesn’t always mean you don’t qualify, but it does make this more challenging. Your interest rate is also determined by your score, having higher payments for lower scores. On the other hand, having better scores makes payments less expensive.

Down Payment

Cash will remain king even though times are changing. The more money you can put down upfront the more buying power you have in the end. There are many benefits to having the prerequisite of 20% down. Putting the 20% down, or more, can eliminate the need for private mortgage insurance (PMI), and let you be able to negotiate for lower interest rates.

It all comes down to how committed you appear, and how financially ready you are to make a giant purchase.

Debt-to-income Ratio

Having a good steady income is excellent, but it isn’t everything when determined your mortgage qualifications. Lenders are looking for assurance you can pay your mortgage back on top of all the other expenses you have. They will begin looking at your front-end ratio, or housing ratio – your monthly house payments, which include insurance, taxes, interest, and PMI all divided by your monthly income. You want this number to remain below 28%.  

The next ratio they’ll look at is your back-end ratio, aka debt-to-income ratio. Once calculated, they determine how much of your monthly pay goes towards your existing debts. This is calculated by your totally monthly debt payments divided by your total monthly household income. You want this number below 36%.

Even if you land slightly above the target numbers, it won’t kill your dream of owning a home in the near future, but it can affect your loan terms.

Assets

Lenders worry most about whether the borrower will have a steady income, and if they have the financial resources on hand to keep up with their payments. You will be asked to submit a list of all your assets, which shows where the money for the down payment is coming from (your money or someone else’s). They’ll also look to see how healthy your savings account and investments are. The fatter your cushion, the better shape you will be in. Start stacking on your cushion and be ready.

Bottom Line

Watch these numbers and take care of them, make the needed changes before you start house hunting, so when you do find that one house, you will be squared away with the lenders.  

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