Down Payment & Affordability
How much of a down payment will I need to buy a home?
The amount of money that a buyer must put down at closing depends on the loan-to-value ratio the percentage of the property's appraised value or sales price (whichever is less) that a lender is willing to loan.
For example, if a property is appraised at $100,000 and the loan-to-value ratio is 90 percent, the lender would be willing to loan $90,000. The buyer's down payment is the remaining $10,000. Because the loan-to-value is a percentage, the higher the sales price of a house, the higher the down payment.
A down payment of 20 percent has been the benchmark for conventional financing, but today, many options are available, some requiring as little as five percent down. A representative from ERA Mortgage can help you determine which down payment option is right for you and your budget. Contact ERA Mortgage for more information about their services.
How does a lender determine the maximum mortgage I can afford?
The three primary areas lenders examine in determining the size of mortgage you can handle include your monthly income; non-housing expenses; and cash available for down payment, moving expenses and closing costs.
The most common way lenders interpret these variables to estimate your mortgage capacity is the Percentage Method. Most lenders feel a family should spend no more than 28 percent of its income on housing costs, including the mortgage, insurance, and real estate taxes. In addition, these housing costs plus your long-term debts (car loans, child support, minimum credit card payments, student loans, etc.) shouldn't exceed 36 percent of your income. Some mortgage companies, including ERA Mortgage, have relaxed ratios to help you purchase the home of your dreams.
Although it is not a standardized method, you can also use the Multiplier Method formula as a general rule of thumb to determine how much home you can afford. Most lenders' guidelines allow a family to carry a mortgage that is two to three times its gross annual income (income before taxes and expenses are taken out). The amount of down payment and the type of mortgage (fixed or variable rate) will determine the precise ratio used by the lender.
To get an idea of how much home you can afford, use the Sample Housing Cost Worksheet, or contact ERA Mortgage to receive a free pre-qualification in minutes.