Can I Afford to Buy a House?
From the moment Pilgrims landed at Plymouth Harbor, the race was on, and each generation began chasing its version of the American dream. For many, including veterans and those in the military community who sacrificed to defend our rights, homeownership, and the security it offers, makes up a fundamental part of that dream.
We all know that wanting to buy a house and affording it are two different issues. So, how do you know if you’ve got the financial muscle to own a home? That’s the easier question to answer. This monumental step you’re about to take deals with more than simply crunching numbers. So, before you think about VA loan requirements and such, you should first be sure you’re emotionally equipped to make what most people consider the largest purchase of their lives. If you’re a first-time homebuyer, that might sound like an intimidating task. It doesn’t need to be. Before deciding to buy a house and apply for a mortgage, you’ve got to take self-inventory. Are you married? Divorced? Single? Are you living with someone and want to buy a house together? Buying a home as an unmarried couple takes more planning than if you were married.
While finances are indeed a significant factor when deciding whether you’re ready to take the plunge into homeownership, you can see that there are other considerations. However, once you’ve passed those mental hurdles, it’s time to take a look at what you’ll need to buy a home with a VA loan.
4 Factors That Determine How Much House You Can Afford
To get an idea of how much you can spend on a house, you’ll need to review these four items: income, debts, credit score, and cash reserves or savings.
- Your monthly income. Figuring your total monthly household income will help determine how much of a mortgage payment you can comfortably afford.
- Your monthly debts or expenses. Listing your debts, meaning any outstanding loans or credit card charges and expenses, allows you to see what other monthly obligations you’ll have in addition to a mortgage payment.
- Your credit score. Your credit profile will determine the amount of interest you’ll pay on your loan and how much money the lender will let you borrow.
- Your cash reserves for a down payment and closing costs. Your cash reserves will prove that you have enough for the required down payment and cover the closing costs. Note that not all VA loans require a down payment.
It is in your best interest to aim for impeccable accuracy when putting these figures together. Knowing precisely how much you can afford before you start searching for your home will help you stay within a comfortable range when it comes to your monthly mortgage payments. That beautiful home you worked so hard for will feel like an albatross around your neck rather than the sanctuary you imagined if you have to stress over monthly mortgage payments that eat up an unmanageable chunk of your income. The upside to the task of figuring out if you can afford to buy a house is that as a military buyer, you can take full advantage of the exclusive benefits that VA loans provide.
BUILD YOUR LEGACY
What Is Debt-To-Ratio (DTI) And How Does It Impact My Ability to Buy a House?
In simple terms, your DTI ratio is your combined monthly debt payments — everything from an existing mortgage and student loans to utility bills and child support — divided by your gross (pre-tax) monthly income. The debt-to-income ratio is a critical metric that banks use to calculate the amount of money you can borrow. Even if you’re not a math wizard, you can easily calculate your debt-to-income ratio. The object is to get as low a DTI ratio as possible. The lower the figure, the more it demonstrates a favorable balance between debt and income and the better chance you have to get the loan you want. On the other hand, a high debt-to-income ratio alerts a lender that you’re deep in debt and probably wouldn’t be able to take on more.
Ideally, housing expenses shouldn’t exceed 28 percent of your monthly income. Here’s a simple formula that’s basic and easy to figure out.
Again, this is the same formula banks use. Note that if you have a high enough credit rating, you might qualify for a higher loan amount with a better debt-to-income ratio.
Which Way: FHA (3.5 Percent Down) Or VA (0 Percent Down)?
Since Congress, under Franklin D. Roosevelt, created the Federal Housing Administration (FHA) in 1934, the agency has insured more than 46 million home loans, making it one of the largest mortgage insurers on the planet. Ten years later, Roosevelt signed the GI Bill of Rights into law, and the VA loan program — mortgage loans guaranteed by the US Department of Veterans Affairs — was born. About 25 million borrowers have availed themselves of VA loans since that time.
That steady popularity isn’t surprising when you consider that, similar to VA loans, FHA provides an affordable way to get into a home for first-time or low-to-middle-income borrowers who might have adequate monthly incomes but not enough reserves for hefty down payments. FHA loans require a minimum down payment of 3.5 percent of the contract sales price of the home. That’s a far more manageable amount than the 20 percent down payment some conventional loans ask for these days, making an FHA loan worth considering for those with less than perfect credit scores.
Although the FHA loan is clearly a viable option, there are plenty of arguments to make for taking the VA loan route. For our military family, VA loans backed by the Department of Veterans Affairs may offer more adjustable credit guidelines regarding foreclosures, bankruptcy, and short sales. And remember the 3.5 percent down payment that sounded so appealing with the FHA loan? Well, there’s no down payment required with most VA financing, marking the VA home loan as the winner if you don’t have adequate savings for a down payment. And if your credit score hovers at 600, you shouldn’t have any trouble qualifying for a VA loan. Because the VA guarantees the loan, borrowers don’t pay PMI (Private Mortgage Insurance), which, depending on the amount of the loan, can save you a significant amount in your monthly mortgage premiums. Another bonus to note is that VA loan interest rates come in far lower than those offered by FHA or conventional loan programs.
As you can see, both forms of financing have benefits. But the quick takeaway is that a VA loan doesn’t require a down payment or PMI insurance and, more likely, will offer veterans and active service members lower interest rates than FHA or conventional loans.
Join Us For More Information On Buying a Home Using a VA Loan
Each month, Aligned Mortgage offers a free VA home loan buying course — “The Truth About the VA Home Loan Benefit Seminar” — during which we educate our veterans and their families on the power of the VA home loan benefit. Join Hawaii’s #1 VA lender and learn how to use your BAH (Basic Allowance for Housing) to build your financial legacy through homeownership. Contact us today at 808.677.5626 or register now for an upcoming seminar.