Whether you’re looking for a beach house for sale in Alys Beach, a condo in Destin, or a home on a large parcel of land in Santa Rosa Beach, you need to know how much house you can afford before you begin house-shopping. Part of that is getting mortgage preapproval, but that’s not all; a preapproval just tells you how much a lender is willing to give you, not how much you’ll have to squeeze when you begin making mortgage payments. This is true whether you’re buying a beach house as a vacation home or you’re buying a primary home.
How Much House Can You Afford?
The last thing you want is to buy a beach house that’s really out of your financial reach, so it’s important that you decide what’s reasonably affordable before you start your search. (You don’t have to borrow as much as your lender is willing to give you, either; if the bank offers you $300,000, you don’t need to take it all.)
How Lenders Figure Out How Much House You Can Afford
Lenders look at your whole financial profile when they’re determining how much money they should lend you. What they’re trying to figure out is whether the amount you’re asking to borrow is reasonable based on how much you make – and what you’re likely to be able to repay.
Mortgage lenders look at your personal information, such as your income, debt-to-income ratio and how much of a down payment you have saved to determine how much money they can let you borrow. They also look at your credit history.
When finding out how much house you can afford, lenders will want to see that you have a steady stream of income and some cash in reserves for emergencies so they can be confident that you’ll repay your mortgage loan. You’ll have to show your lender your last two tax returns, a few recent pay stubs, and your bank statements. If you have income from other sources, you’ll have to prove it; many lenders will look at direct-deposit receipts or court orders.
Your Debt-to-Income Ratio
Here’s a simple rule: Your monthly housing expenses, which include the principal, interest, taxes and insurance (commonly called PITI) should be less than 28 percent of your monthly income before taxes.
Lenders call this the front-end ratio, and it works like this:
If you have a monthly income of $10,000, your mortgage payment and home-related expenses shouldn’t exceed $2,800. You can even stretch that figure to 30 percent, which would mean your monthly homeowner costs need to fall at or below $3,000. Anything over that and you’re at risk of spreading yourself too thin.
Lenders also calculate a back-end ratio. Your back-end ratio includes all of your debt obligations, including:
- Car loans
- Student loans
- Minimum credit card payments
- Other obligations
- Your house payment
The back-end ratio is the same as the front-end ratio, except that it includes a monthly house payment as well. Lenders typically want your back-end ratio to be 36 percent or less.
If you have a monthly income of $10,000, your mortgage payment plus all your other obligations shouldn’t exceed $3,600.Many lenders are a little bit flexible when it comes to these ratios, though. Well-documented mortgages can have back-end ratios of up to 43 percent.
Your Down Payment
While 20 percent has long been the standard for down payments, there are many loan products that don’t require you to put that much down. In fact, some lenders will accept as little as 3 percent down, and VA loans require nothing down. However, putting down more of your own money means you’re borrowing less from the lender – and that can make a huge impact on your monthly mortgage payments. (Borrowing $160,000 versus borrowing $200,000 means you save big on interest over the life of your mortgage!)
If you put down less than 20 percent, your lender will require you to buy private mortgage insurance, or PMI. Private mortgage insurance protects the lender if you default on your payments. The only exception is if you’re using a VA loan, which doesn’t require PMI with down payments of less than 20 percent.
Your Credit History
Your lender will examine your credit history to determine whether you even qualify for a mortgage loan. It doesn’t have much to do with how much a lender is willing to give you, but it does show lenders whether you’re likely to repay them.
Are You Buying a Beach House for Sale Along 30A?
If you’re buying a home in Grayton Beach, Panama City Beach, Destin, or any of the surrounding communities, we’d love to help you find the perfect place.
Call us at 850-213-3048 or request a free consultation with one or our agents. Our expert 30A real estate agents will start searching for your dream home right away.
About 30A Local Properties:
30A Local Properties is located in Grayton Beach, FL and services the South Walton community. The team of locals confidently offers the experience of over six hundred South Walton real estate transactions, nearly three decades of banking experience in commercial and residential property holding positions, and over a decade of entrepreneurial real estate experience in property investments and management. Visit our website at www.30alocalproperties.com or stop by our office and meet the team:
30A Local Properties
35 Clayton Lane, Suite B
Grayton Beach, FL 32459
P: (850) 213 3048
F: (850) 213 0035