How Much House Can You Really Afford? Here’s What Loan Officers Are Looking At.

Blog posted On January 04, 2024

Imagine you find your dream home for sale after looking for months. It has a big yard for the dog, a basement for the kids, the perfect room for your home office, and it’s in a great neighborhood. However, when you reach out to an agent or loan officer to get the process started you discover that the house is way over your budget, and you have to go all the way back to square one.

What should you do as a home buyer to keep this from happening? With so many factors in the home buying process, how do you know how much home you can really afford? Continue reading below, and you’ll be fully prepared to start your home buying journey. 

When Should You Reach Out to a Loan Officer?

Before even starting to search for a home, you should be talking with a loan officer. Loan officers are a representative of a bank or other financial institution that guides borrowers through the loan application process. These professionals will be able to let you know what current market trends are, assess all the factors in determining how much of a loan you can receive, and will help you find the best and most cost-effective loan possible.  

How do they do all of this? Here are the six main factors that loan officers look at when determining how much home you can afford.

Credit History

One of the first things your loan officer will check out is your credit score. This three-digit number represents how low- or high-risk of a borrower you may be, and it’s based on a number of factors. When a loan officer pulls your credit report, they are looking at how you have handled past debts such as previous loans, bankruptcies, credit card balances, utility payments, and more.

To get ahead of the game on your credit score, ensure you are making choices such as paying bills on time, keeping a low credit card balance, managing your current debts, and limiting applications for new credit.

Income

It’s crucial in the loan application process to show your loan officer that you have enough supplemental income to afford your monthly mortgage payments. With most loans having a life cycle of 15 to 30 years, you’ll need to provide proof of continued, stable income.

Loan officers will look at pay stubs, tax returns, and more to ensure that you will be responsible for your future loan payments. If you are self-employed, they’ll take a look at your adjusted gross income, service contracts, balance sheets, and tax returns to determine your income levels.

Employment History

As part of ensuring you have a stable income, your loan officer will reach out to your current employer to confirm employment. Depending on how long you have been employed at your current company, they may also call your previous employer. In addition, loan officers will look at your employment history over the last two to three years, taking note of any long periods of unemployment or unusually low income.

Existing Assets

Loan officers will also take the time to examine any other assets you currently possess. This ensures that even if you were to lose employment, you would have one or two other assets available to convert to cash and make your monthly payment. Assets can include a savings account, retirement fund, owned property, or stock investments.

Debt

With a loan as large as a home loan, it’s only expected that a loan officer checks out your current debts. Student loan debt, car loans, and/or credit card debt can impact how much you have leftover to make a monthly house payment. Loan officers will take a close look at your payment history on those debts and match it with your income to form your debt-to-income ratio. 

The debt-to-income ratio shows what percent of your monthly income you are spending on current debt, and it allows the lender to see what percent you’d be able to pay on the future home loan.

Down Payment

Finally, loan officers will ask how much you have saved for the down payment. How much you put forth on the down payment will impact how much your monthly payment will be.

Your loan officer will be able to take all of these factors listed above and help you decide which loan program is most beneficial for you.

Prepare For Your Home Buying Journey

There are several intricate details involved in the loan application process, and a loan officer will be the best person to guide you through it. When budgeting for your future home purchase, consider other regular monthly payments you may have such as healthcare, groceries, utilities, school tuition fees for your kids, etc. You may be able to technically afford the monthly mortgage payments but may come up short once you add all of the monthly costs together.

For the best chance at making wise financial choices about your home purchase, connect with a local loan officer to answer all of your questions.