The question I always hear is: “How much house can I afford?” You don’t want to be “house poor,” because you want to be able to do some other things. But, there are some rules of thumb. Sometimes we say 2.5 times your household income is the total purchase price, or you can use 31% of your gross income for that mortgage payment every month. Or, you can include all of your debt and make that 43% of your gross income. I usually try to go below that amount—again, to give you some wiggle room.
What about that down payment? That’s where most people get hung up. Conventional loans require 20% down. So, if you’re purchasing a $150,000 house, then that’s $30,000 you have to come up with. That’s a lot for a family. Know that you can do less than that, but anything less than 20% means that you’re going to have to have mortgage insurance; and that’s going to add about 1% annually. On a $250,000 house, that means you’re going to pay about $200 extra every month just to cover the mortgage insurance.
Some options on lower down payments:
A Fannie Mae loan only requires 5%, but remember that you have the mortgage insurance.
FHA loans require 3.5%.
Under FHA there’s something called the Conventional 97 which only requires 3%.
Then there is the Rural Housing Loan also under the FHA. There’s no down payment required for this. It is for low income buyers. And even though it says “rural,” it’s not just for rural areas.
So those are some options for everyone to look at who don’t quite have that 20% down payment.
If you are a veteran—for those military people, we have a great program. There is no down payment and no mortgage insurance. Again, that’s only for the military. And, the interest rate (the mortgage rate) is usually 37.5% below the market. So, that’s a great deal for our military families.