The term of your loan will also dictate what your monthly mortgage payment looks like. A shorter-term loan -- for example, 15 years -- will leave you with a lower interest rate on the amount you borrow. But it will also result in a higher monthly payment, since you're paying off your home in half the time it would take with a 30-year mortgage.
The house you can afford versus the house you're approved to buy
You may run the numbers and determine you can afford a certain home and mortgage based on what your monthly payments will look like. But that doesn't mean you're guaranteed to get approved for the full mortgage amount you're after.
Going back to our example, say you want to buy a $250,000 home and have $50,000 on hand for a down payment. Your lender, based on your income and other factors, may only approve you to borrow $180,000.
If you don't have another $20,000 to put toward that home, it may not be an option. In that case, you'd either have to look for a less expensive home or postpone your plans to buy until you're able to save up more money to put down at closing.
It's a good idea to get pre-approved for a mortgage before you start looking at homes. You might run the numbers and determine you can afford a home of a certain amount, only to then not get approved to borrow what you need. If you start with a pre-approval letter, you'll see what loan amount you're eligible to take out and can work around that number when searching for homes.
Now that I know how much house I can afford, what next?
So you've figured how much you can afford to spend on a home. That's a great first step. Now, you'll need to actually find a home that meets the right criteria. Here's how to go about it.
Find a lender
Once you know how much house you can afford, you'll need to find a mortgage lender. It's a good idea to shop around with different lenders to see what mortgage rates they're offering. You can simply google "mortgage lenders in my area" to see which options pop up. A better bet, however, may be to talk to people you know who recently got a mortgage and see which lenders they had success with. Doing so could help you narrow down your choices.
Get pre-approved for a mortgage
A mortgage pre-approval won't guarantee you a home loan. But if your financial circumstances don't change for the worse between when you get that letter and when you apply for a mortgage, then there's a good chance you'll have no problem getting approved for an actual mortgage.
A pre-approval letter will tell you how much money you're qualified to borrow for a home. It's a good thing to have when house hunting because it will help you know what price range to stick to. Plus, it might help you get an offer accepted on a home, as it sends the message you're a serious buyer whose finances have already been looked at.
Find a real estate agent
You technically don't have to use a real estate agent to find a home. But as a buyer, there's no reason not to enlist an agent's services, since you don't pay a fee when you're on the buying side. A real estate agent can help you navigate your local housing market and figure out what offer to make on the properties you're interested in buying. An agent can also negotiate with sellers on your behalf.
Apply for a mortgage
Once you figure out which lender you want to use, you can apply for an actual mortgage. From there, you'll be approved or denied based on your financial picture. If you're approved, you won't get your money to buy a home right away. It can take 30 days or more to finalize a mortgage, because your lender will need to more thoroughly examine your finances and make sure your home appraises for a high enough price to justify your loan amount.
You'll also generally need to go through a home inspection before closing on your mortgage. During an inspection, a professional will determine if there are structural problems with the home, or problems related to things like mold, plumbing, and electrical setups. If problems are pinpointed, you'll need to work with your seller to have them addressed before you close on your home.
Close on your mortgage
Once your lender is ready to close on your loan, you'll bring a check for your down payment and will sign the necessary documents to put your mortgage into place. You'll also have to pay closing costs on your loan, which can amount to 2% to 5% of your mortgage amount. Most lenders let you roll your closing costs into your mortgage and pay them off over time.
Whether you're a first-time home buyer or are moving from one home to another, it's important to know how much house you can afford. Crunch those numbers carefully before you make an offer on a house so you don't wind up overspending on a home and regretting it after the fact.
Still have questions?
Here are some other questions we've answered: