How much house can I afford?

Buying a house is an really exciting process and I just bought a house. I am a first time home buyer and can officially say I own a house. Well, actually our mortgage company owns most of this house. But who cares? Although it is much easier to buy a house in the U.S. than in Germany, I made sure that I knew what mortgage companies are looking for when they determine whether or not to give a loan. What you have to consider regarding a mortgage loan is explained in the following. 

How to get approved for a loan

Before the housing crisis of 2008-09, getting a home loan was easy. Everybody could apply for a mortgage, and although banks knew that many lenders couldn’t afford the payments, they approved hundreds of thousands of mortgage applications to lenders with very bad credit scores.

Nine years later, the real estate market is recovering, but the mortgage crisis has left its mark. I think that is a good thing. It seems to be so much more reasonable to me when banks make sure that lenders are able to pay their loans back. But as I said, it still seems to be easy for potential borrowers to get approved for a loan if they are able to prove that they are prepared to pay a mortgage.

Buy your American house with the right mortgage loan.

 

Before I even started thinking about buying a house, I made sure that I knew this:

  • What was Andrew’s and my monthly income?
  • What was the sum of our total monthly debt payments? (auto loans, credit card payments, etc.)
  • What was our credit score?
  • How much cash could we put down?
  • And what was the highest monthly mortgage payment that we could afford? (based on our income)

After that we had to decide what kind of a loan we would want. 

What types of mortgage loans are out there?

We had to know our income and decide if we wanted to put money down or not. And if we wanted to put some money down, how much could we afford?

FHA Loan

We needed to decide between a government-insured and a conventional loan. Borrowers who have a rather low income, a poor credit score, or can’t or don’t want to put at least 20 percent of the purchase price down, can apply for a government-insured loan. With the FHA loan the government insures the lender through the Federal Housing Administration (FHA) against losses that might result from borrower default. But the borrower has to be able to put at least 3.5 percent of the purchase price down in order to be eligible for that kind of a loan. Although putting down only 3.5 percent would have been nice for us, the size of the monthly payments would increase with an FHA loan because we would have to pay for mortgage insurance.

VA Loan

Since Andrew served in the Army, he would have also been eligible for a VA loan. This type of mortgage is guaranteed by the federal government (that means that the lender would get reimbursed by the U.S Department of Veterans Affairs (VA) even if we couldn’t pay the mortgage anymore) and we wouldn’t have had to put down a single dime in order to receive this kind of loan. No down payment, whatsoever. That was a very tempting choice, but not putting money down would mean that we would have to pay more interest and the full price for the duration of that loan. In order to keep the monthly mortgage payments within our limits we would have to buy a house with a smaller price.

Conventional Loan

But we decided to go with a conventional home loan. This loan is not insured or guaranteed by the federal government. Mortgage companies usually request a down payment of at least 20 percent of the purchase price and they thoroughly check the stability of the borrower’s financial situation. We knew that we would pass this test. We have both worked for the same employer for more than six years and have always had a steady and reliable income. And we also knew that selling Andrew’s house would give us the money for the down payment.

Check all available loans before deciding on the right one for you.

 

Qualifying for a mortgage

And then the moment came: we made an offer for a house that was accepted by the buyer. The day after, the mortgage company that worked with our real estate agent contacted us with a list of documents that we had to send to them as quickly as possible. This is what they wanted to see:

Proof of income

  1. Our last two pay-stubs
  2. Copies of our past two tax returns
  3. Copies of my green card and passport.
  4. Only I had to send them the most recent statements of my checking and savings accounts. The mortgage company wanted proof that I had the cash to put part of the money down.
  5. Andrew had to send them the preliminary closing disclosure from the sale of his current residence showing that the previous mortgage was paid in full and that there was enough left for his portion of the down payment of new house’s purchase price.
  6. Andrew also had to send them his divorce decree because they needed to determine whether they needed to add any additional liabilities to our application.

That’s it! Piece of cake, as my friend would say. Andrew and I got approved for a loan and the whole approval process went very smoothly because we live in good circumstances and have been able to prove that we are reliable borrowers.

And I can’t tell you how much we love our new house!

Useful links

For more information on government loans, take a look at this website: https://www.govloans.gov/

This is a great website to get very detailed info about FHA loans: https://www.fha.com/fha_credit_requirements

You can request a free copy of your credit report from each of the three major credit reporting agencies – Equifax®, Experian®, and TransUnion® – once each year at AnnualCreditReport.com or call toll-free 1-877-322-8228.

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