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Step 2: Determine if you are financially ready to buy a home
Knowing how much you can afford to spend on a home is a critical part of the homebuying process.
Here are a few vital pieces of information you need to determine what you can spend:
- Your credit score
- Your income
- Your current debt obligations
- How much money, if any, you have for a down payment
Know Your Credit Score
Your credit score is a number between 300-850 that lenders use to determine your worthiness of receiving credit or money. For example, a mortgage lender will use your credit score to help determine if they will give you a loan to buy your house and, if so, how much, at what interest rate, and more.
The lower your credit score, the more challenging it can be to get a mortgage or the more costly. Lenders may require more of a down payment on your home or charge you a higher interest rate if you have a low credit score.
Some home loans, such as those through the Federal Housing Administration (FHA), are available to homebuyers with credit scores as low as 500.
You can check your credit score through this free site provided by FICO.
Use a Home Affordability Calculator
What you can afford to spend on a home depends on how much money you earn, the debt payments you’re already making, and more. This home affordability calculator is an easy way to get an idea of how much you can afford to spend.
You enter your income, existing debt payments, how much you can spend on a down payment, and other information into the calculator. Then the calculator gives you an estimate of how much you can spend on a house and what your monthly mortgage payment may be.
You may not know some information, such as your mortgage interest rate or home insurance costs.
The goal at this stage is to get as realistic an idea as possible of what you can afford to spend on a home, but you can add and update the numbers you enter into the calculator as you go through the homebuying process.