If you’re looking to purchase a new home in the next few months to a year, one concept you’ll need to familiarize yourself with is the idea of buying power. Sometimes called purchasing power, buying power is determined by looking at the overall health of your finances. There are several key factors that inform your buying power; these are looked at by your lender with the end goal of determining your buying power. Keep these factors in mind as you begin your search for a home.
1. Credit score.
You credit score is the culmination of five factors: payment history, balance to credit limit, length of credit history, credit mix, and new credit, with varying percentages of importance given to each factor. The credit score you have when you apply for a mortgage not only affects whether you receive a loan, but also the type of loan for which you are eligible. Having a lower credit score may earn you the unhappy side effect of higher interest rates, so it’s important to have the highest credit score possible when you apply for a mortgage. If you have a low credit score, don’t fret; a lower credit score does not automatically disqualify you from applying for a mortgage, and Southern Trust Mortgage has an in-house credit specialist that can help you improve your score, insuring that you receive the best mortgage possible.
2. Debt-to-income ratio
This number looks at your monthly income compared against your monthly debts. Lenders use this ratio to determine whether you are reliably meeting your current debt obligations, and the likeliness that you will continue to do so once you receive a mortgage. A lender will look at your monthly payments -car payments, student loans, credit card payments, etc.- and divide the total monthly debt against your monthly income. Ideally, your DTI ratio should be at or below 36% (41% for VA and FHA) for a lender to feel they can reliably lend to you.
3. Down payment
Although it appears third on our list, the importance of a down payment when buying a home cannot be overstated. Even if your credit score is healthy and your DTI ratio is too, having a large down payment can significantly lower how much you’ll pay throughout the life of your mortgage. Many mortgage professionals quote a 20% down payment as ideal, and minimum down payment percentage amounts apply depending on the loan type. A large down payment can affect or eliminate the need for private mortgage insurance, can give you the ability to negotiate for better loan terms, and can even make your offer on a home the most competitive offer. A large down payment shows sellers and lenders that you’re serious, ready, and able to take on the large financial responsibility of a home.
One way to be certain of your buying power is to determine the loan type and loan amount you are eligible for before you begin shopping. At Southern Trust Mortgage, we offer a program called Priority Approval. Priority Approval is unique in that, unlike regular pre-qualification letters, it’s a true underwriter approval, guaranteeing you, your realtor, and sellers that you are approved for “X” loan amount. Not only does Priority Approval take the guesswork out of shopping for a home, it also makes any offer you submit that much more appealing to sellers and their agents. Knowing that you are 100% approved for the loan offer makes it more competitive, and sellers will be more likely to accept.
To learn more about Priority Approval, our in-house credit specialist, or any of the loan programs we offer, contact Southern Trust Mortgage today and let us make home happen for you.