The first thing you need to do before ever contacting a real estate agent to start showing you homes is to find out what you can actually afford. Many agents won't take you out until you can show them a pre-qualification letter from a lender. And sometimes if the agent has never heard of that lender, or it's an online lender that isn't trustworthy, the agent will ask you to get pre-qualified by their preferred lender.
Then there are some agents that will show you a couple of homes to get to meet you, but once you've seen some they will ask you to get pre-qualified before they show you any more. I have done that and some of those buyers, who thought they were fully qualified, ended up falling in love with a home I showed them, only to find out they were not qualified to buy it. That's not a good feeling!
What Does "Buying Power" Actually Mean?
The term really means what you can get pre-qualified/approved for. This amount would represent the highest mortgage a lender would give you. It is based on several factors:
- How much money you have for a downpayment
- How much money you will have left after the closing
- Your credit score
- Your debt-to-income ratio
That is a simple list - there will be other things a lender will want from you before they will give you a pre-qualification letter. Click here to get an idea of what closing costs are associated with making a Scottsdale home purchase.
Why Do You Need to Know Your Buying Power When You Just Start Looking?
I can't tell you how many people misjudge what their buying power is. Most think they can buy much more than what they're actually qualified for, if they're qualified at all. And then there are others that don't know if they can qualify and are pleasantly surprised when they're not only able to buy, but their buying power is higher than they thought.
There is no reason to start looking at Scottsdale homes for sale until you know what you can afford. Some people love looking at homes and will tour open houses. They're not ready to buy, and they might just like looking at different home styles and decors. Open houses are just that - they're open to the public and you normally wouldn't have to show proof of qualification to go into one.
However, be prepared to be questioned by the agent holding the house open. Did you know they really don't expect to sell that house because it's "open"? They're holding the house open to try to find unrepresented buyers (or the neighbors, in case any of them are thinking of selling their Scottsdale homes). So if you walk into a house held open by a Scottsdale real estate agent, be prepared to answer some questions.
What Can You Do About Buying a House Before You Get Qualified?
If you know you have a goal of buying your own place, be it a condo, Scottsdale townhouse, or single-family home, I realize it's exciting to start looking at places online, like using the home search I have on this website. No matter what real estate website you search on, if you start saving your searches and/or homes or asking questions, you will hear from a real estate agent. And once again, at some point in time, they will ask you if you've spoken to a lender yet.
You can search away on this website for Scottsdale, Cave Creek, Carefree, North Phoenix, Paradise Valley, Fountain Hills, and all of the homes in the Arizona MLS, and take as long as you'd like until you're ready. Create multiple searches (you can search for multiple towns in one search), save them and you'll start to learn what prices are today and what you can get for the money.
You can also use our calculator, which is also on the page of every listing, to get an idea of what the mortgage payments would be using today's prices and interest rates. If you have an idea of what you can afford, or what you'd be comfortable with, then this will tell you what price range you need to be in.
If you're ready to actually start looking at particular homes, you can click a button on each home's webpage and I'll be notified. This site is created to get as quick a response as possible.
What if You're Not Ready to Speak to a Lender
You might have fun searching for homes on this website and using the calculator, but below are some basic charts to give you an idea of how to calculate prices.
Work Out Your Buying Potential
What’s your buying potential? Fill out this worksheet to get an estimate.
|Housing Expense Ratio:|
|1. Monthly income before taxes||$|
|2. Multiply line 1 by 0.28||X 0.28|
|3. Monthly mortgage payment (PITI) should not exceed this amount||= $|
|4. Monthly income before taxes||$|
|5. Multiply line 4 by 0.36||X 0.36|
|6. Total monthly payments on all debts (including mortgage) should not exceed this amount||= $|
|7. Subtract the total monthly payments on all outstanding debts (e.g., car loans, credit cards, student loans, etc.)||- $|
|8. The monthly mortgage payment should not exceed this amount||$|
|9. Look at line 3 and line 8. The lower figure is an estimate of the maximum mortgage payment in consideration of your income and debts.||$|
|10. Multiply line 9 by 0.80||X 0.80|
|11. This equals portion of your mortgage payment that is the principal and interest only||$|
|12. Use the table below to see the size of the loan you may be able to obtain with this monthly mortgage payment.|
Source: Iowa State University Extension, What is your house-buying power?
Monthly Payment on 30-Year Fixed-Rate Mortgage
Didn’t see your desired loan amount?
Use the table below to estimate your monthly payment (principal and interest) per $1,000 of your loan. To figure out an estimated loan payment, multiply the factor by the number of thousands in the amount of your mortgage. For example, if you intend to borrow $400,000, with a loan term of 30 years at 4% interest, multiply 4.77x 400 = $1908 per month.
|Interest Rate||15-Year Term||30-Year Term|
|Monthly Payment||Monthly Payment|
Source: HSH.com - click here
There are Other Expenses to Buying and Owning a Home
The charts above are giving you an idea of the amount of principal and interest that will a part of your mortgage payment. But there will also be taxes and insurance. Usually, if you have less than 20% down, your lender will want to create an escrow account with them to collect a monthly amount to cover both of these expenses. If you put less than 20% down, you will also have to pay mortgage insurance (MIP - Mortgage Insurance Premium - for FHA financing and PMI (Private Mortgage Insurance - for conventional). This is insurance your lender gets to cover the difference between a 20% down payment and whatever you actually put down.
These extra amounts will be added to the principal and interest, and all of these expenses will incorporate your entire monthly mortgage payment. You also need to consider that if you buy a place that has an HOA (Homeowner's Association), that will be an additional fee that the lender will take into consideration.&
You Don't Have to Pay Anything to Get Pre-qualified
I hope this explains why it's so important to find out your true home buying power before you start actually looking at homes. Let's say you fall in love with a home you found online and you get an agent that will show it to you without being pre-qualified, or maybe it's a home you saw at an open house.
You love this place and want to make an offer. Before you can make an offer, the agent will tell you that you need to get pre-qualified. You contact a lender, only to find out that you're not ready to buy right now. It could be too low of a FICO score or your debt-to-income ratio isn't acceptable, or you just don't have enough funds on hand. I've seen buyers not qualify because they just started a new job, forgot about an outstanding judgment, or bought a new car.
A good lender will let you know what you need to do to get mortgage-ready and to get your credit score in shape. It might take a while to do so, and it might not take that long at all. I've had many buyers come back to me when they got their financial and/or credit situation straightened out. It's a great feeling when you can do that.
I Can Help You Figure Out Your Home Buying Power
I prefer not to qualify someone myself because lenders now have their own special "calculators" that they can plug in your information and give you a quick answer. Qualifying isn't as simple as you might think.
But I can give you the name and contact information of a great lender that works in Scottsdale, Cave Creek, Carefree, North Phoenix, Paradise Valley, Fountain Hills, or wherever you're looking in the area.
Give me a call at 480-877-1549Posted by Judy Orr on