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How Much Home Can You Afford? How to Build in a Buffer

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A row of vibrant, modern residential houses with red and grey siding under a blue sky, representing affordable housing options.

As you shop for a home, you need to be budgeting carefully for your future. This can be a challenge in some ways, because the future is hard to predict. You have a stable job today, but what about ten years from now? What new debts might pile up?

In this guide, we go over how you can take future uncertainties into account as you are calculating how much home you can afford. That way, you will direct your home search realistically.

  1. Calculate the maximum you can afford. First, calculate how much room you have in your budget right now to make payments on your home. Remember, paying for your home will include:
    • Monthly mortgage payments
    • Mortgage insurance payments
    • Homeowner’s insurance payments
    • HOA fees
    • Property taxes
    • Maintenance and repair costs
    • Utilities costs
  2. Do the mortgage pre-approval process. Next, you can apply for mortgage pre-approval. When you are pre-approved, you will receive a letter which states how much the lender is willing to loan to you. This number will help you further solidify your budget for buying a home.
  3. Subtract some income, and add some debt. Now let’s talk about how to account for future changes. If all goes well, hopefully your income will stay the same or increase as you continue to develop your career. But setbacks are possible, especially with AI threatening so many fields. So, you should give yourself a bit of a buffer. Subtract some income in your personal calculations. Add some debt as well, in case you need to buy a new vehicle, pay emergency bills, etc. in the future. This will lower the amount of home you can afford, but that is okay. It’s better to err on the safe side.
  4. Avoid counting bonuses. Do you sometimes receive bonuses or commissions as part of your job, or maybe work overtime? You may be tempted to count these as part of your income when you are calculating how much home you can afford. But it is wise not to add them in, unless your employee contract specifies them as an annual part of your income. If it doesn’t, then you never know when a bonus might be discontinued. And there could be years where you just work less overtime or earn fewer commissions. You do not want to be struggling on those years financially. So, calculate with the assumption you will only receive your salary.
  5. Account for inflation. The longer the term of your mortgage, the more you will need to account for inflation. It would be challenging to predict the exact rate of inflation. But you can look at old inflation data spanning the past 10, 20 or 30 years to get an idea how inflation has progressed in the past. Hopefully, your wages will rise as inflation does, which would make it less of a concern. But if you are in an industry where pay raises are not common, or it is hard to jump from job to job to increase your pay, you will need to take inflation more seriously as you run these calculations.
  6. Factor in unpredictable costs. Some of the costs of homeownership will be predictable. If you get a fixed mortgage rate, for example, you know what you will be paying on that for the duration of your home loan. But other costs can be harder to predict. For instance, utilities costs could rise in the future. So can HOA fees. Even a house in good condition when you buy it may need pricey repairs at some point down the line. One common issue that a lot of homeowners don’t anticipate is property taxes. If the value of your property goes up after you buy it, in general, that is a good thing. It means your equity has gained value, and your home is now worth more than what you put into it. If you move out someday, you may be able to sell it at a profit. But when the value of a property goes up, it is reassessed, and your property taxes can climb as well. Homeowners who do not anticipate this increase in property taxes can sometimes get price out of the homes they own, and find themselves having to sell as a result. So, try and guess what property taxes could end up costing you in the future if property values go up. You can access historical data for the county where you are buying your home to get a feel for how property taxes have risen in the past as property values went up. Consider how that will impact the affordability of your home in the future, and plan accordingly when you budget for your home. That way, you will not be caught off guard, and your home can stay affordable as its value goes up.

Buy a Home in Indianapolis or Beyond

Grandview Lending can help you calculate how much home you can afford, and answer any questions you may have about budgeting for a home purchase. We can also get you pre-approved quickly and easily. If you are ready to get started, please give us a call at (317) 255-0062 to schedule your mortgage consultation. We can help you buy a home in Indianapolis or throughout Indiana.

Questions to Ask So You Can Find Your Ideal Home Loan

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Buy a Home in Indianapolis IN

The process of choosing a mortgage may seem complex, but you can narrow down your options pretty quickly just by asking yourself a few key questions.

In this post, we go over some of the same questions we might ask you during your consultation to help you determine what type of home loan will fit your needs.

8 Questions to Ask To Find Your Ideal Home Loan

  1. What is your budget for a home? Before you start shopping around for a home loan, you should do some basic math. Calculate how much you can afford to spend on your home, factoring in mortgage payments, insurance payments, taxes, utilities, interest, and other costs of homeownership. Once you come up with an estimate, you can proceed.
  2. How long will you live in your home? Another valuable question to ask yourself is whether you think you will only spend several years in your next home, or whether you plan to make it your home for the long term. This question can help guide you in choosing a format for your interest rate. Adjustable rates are usually best if you will only spend several years in the home. In most other circumstances, a fixed mortgage rate is most suitable.
  3. How much do you have available for a down payment? Figure out how much you can afford to put down on a home. Different types of mortgages have different minimum down payment amounts. If you can only afford a small down payment or no down payment, you may want to lean toward government-backed mortgage products. But you should not rule out conventional mortgages. Their down payments can be very low with competitive borrower qualifications.
  4. What is your credit score? Speaking of qualifications, you should also check your credit score before you apply for a mortgage. If your score is on the low side, there are some lending products that may be easier for you to qualify for, like FHA, VA and USDA loans.
  5. Are you self-employed? You should consider not just your income, but how you earn your income when you are about to purchase a home. If you happen to work for yourself directly, you cannot use a W-2 form to apply for a mortgage, as is traditional. Thankfully, you can instead just apply for a self-employed borrower loan, using your bank statements to verify how much you earn.
  6. How much do you need to borrow? Once you know your budget for a home, you also probably can figure out roughly how much financing you are going to need for the home of your dreams. If the amount you require is in excess of the conforming loan limits for your county, you need to look into a jumbo mortgage.
  7. Where are you shopping for a home? The location where you are looking for a home is important not only for checking the conforming loan limits, but also to see if you might qualify for a USDA mortgage. This type of home loan backed by the US Department of Agriculture does not require a down payment and offers other benefits as well. You may qualify for it if you are buying a home in a rural location.
  8. Are you a veteran? Your veteran status is relevant to the home buying process since based on your service record, you might qualify for a VA mortgage. As with USDA loans, VA mortgages do not require a down payment. They also do not require mortgage insurance.

Let Us Help You Find the Right Mortgage in Indianapolis or Beyond

You may already have a better idea what type of mortgage will suit you after reading this post. But if you still need additional help, Grandview Lending can go over your situation with you and help you identify an ideal lending product. Please call us today at (317) 255-0062 to schedule your consultation.

When to Choose a Conventional Loan vs. an FHA Loan

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Conventional Loan in Indianapolis Indiana

Two of the most popular types of mortgages you can apply for in Indianapolis are conventional loans and FHA mortgages.

You might have a difficult time understanding the differences between these two types of loans and the pros and cons of each. Which type of mortgage is most appropriate for your situation?

To help you make an informed decision, below are some guidelines for when a conventional loan or FHA mortgage might make the most sense.

When to Choose a Conventional Loan in Indiana

A conventional mortgage is not insured by a government department such as the FHA or VA. It fits within the Fannie Mae and Freddie Mac conforming mortgage guidelines.

Here are some situations where a conventional loan might make sense:

  1. When you have a high credit score and low DTI ratio. If you have a reasonably strong credit score and debt-to-income (DTI) ratio, you may be a solid candidate for a competitive mortgage with a low down payment and low interest rates. Your credit score should not be lower than 620, and your DTI ratio should not exceed around 43%.
  2. When you are flexible with a down payment amount. With a competitive credit score and DTI ratio, you could have a low down payment when you purchase a home with a conventional loan. But if you are able to make a higher down payment, a conventional loan can still be a great choice even without perfect credit or an ideal DTI ratio. Doing so can qualify you for low interest rates and no PMI requirement.
  3. When you need to buy a primary residence or another type of property. With a conventional mortgage, you can not only finance the purchase of a primary residence, but also a second home, vacation home or rental property.
  4. When you want the fastest, simplest mortgage process. Property standards for conventional loans are a bit more relaxed than they are for FHA loans. The mortgage process also tends to be routine and straightforward for fast closing. That being said, if you go through an experienced FHA mortgage company like Grandview Lending, the FHA loan process can also be rapid and easy.

When to Choose an FHA Loan in Indiana

An FHA mortgage is backed by the Federal Housing Administration. This backing reduces credit score and DTI ratio requirements while keeping interest rates competitive.

Following are some situations where an FHA mortgage might be most suitable.

  1. When you have a lower credit score and higher DTI ratio. When your credit score is under 620 and/or your DTI ratio exceeds 43%, an FHA mortgage makes it possible for you to still buy a home with low interest rates and an affordable down payment. Of course, the higher your score is in the lower your DTI ratio is, the more competitive the loan offers you receive will be.
  2. When you can afford mortgage insurance premiums. You do have to purchase mortgage insurance as part of your FHA loan agreement. It is a monthly ongoing expense. An FHA mortgage is appropriate only when you can afford this expense on top of your premiums and interest.
  3. When your down payment funds are limited. Putting a larger down payment on a home is the key to improving conventional loan offers when your credit score is not perfect. But this is not an option for every homebuyer. If you do not have the ability to put 20% down on a home, consider an FHA mortgage. If your credit score is at least 500, you may qualify for a 10% down payment. If your credit score is at least 580, you may qualify for a 3.5% down payment. Even when you put a low down payment on a home with an FHA mortgage, competitive interest rates remain available. The reduced risk profile of an FHA mortgage combined with the insurance you are paying are what make this possible.
  4. When you are shopping for a primary residence. You cannot use an FHA mortgage to purchase a property if it will not be your primary residence. If you do purchase a multi-use property with an FHA mortgage, you will have to live in it.
  5. When lower loan limits are not a concern. Loan limits for FHA mortgages tend to be low compared to some other types of mortgage loan limits. For many homebuyers, this will not be an issue. If, however, you require higher loan limits, you may need a different type of loan.

Grandview Lending Can Help You Figure Out Which Type of Loan is Most Suitable for Your Needs

After reading through the post above, you should feel better informed as to the differences between conventional and FHA mortgages and which may be more appropriate given your situation.

If you have additional questions, we can provide you with detailed information specific to your concerns during your consultation. If you are ready to figure out what type of home loan is right for you in Indianapolis or elsewhere in Indiana, please give us a call at (317) 255-0062.