The baseline question everyone should ask themselves when considering homeownership is: Can I afford a house?
Are you financially ready to buy a house? Where can you afford to buy? How will you pay for the house? Your ability to afford a house depends on when, where, how, and sometimes why you plan on buying a house or property.These are questions you need to be able to answer. In some cases, the reason why you want to buy a house can impact your ability if your intentions meet certain requirements for special programs.
Regardless, this is an exciting question. It means you’ve gotten to a point in life where you’re ready to plant your feet in the sand and become a homeowner. Matching what you’ve saved for a down payment with a monthly mortgage payment that aligns with your current expenses and monthly income is ultimately what it means to afford a house. There are special programs available that make affording to buy a home more realistic for millions of Americans. If you’ve never bought a house, it’s a question that often precedes more questions.
- How much can I afford with my salary?
- How do I even do it?
- How do I pay for it?
- How much do I need for a down payment?
- How do I know how much my payment will be?
- How much payment can I afford?
If only these were black and white questions with black and white answers. Fortunately, there are steps you can take to educate and prepare yourself for the journey into homeownership.
How Do I Buy a House?
Unless you’re sitting on a pile of cash or the lottery has been kind, you’ll need a mortgage loan to buy a home. There are multiple types of mortgage loans available, each with different features depending on your circumstances. The purpose of these programs is to make homeownership attainable for more people. Therefore, even if you haven’t been planning to become a homeowner, there are likely options readily available should you decide to do so.
So, Can I Afford a House?
Since there is no black and white answer, the best way to determine if you can afford a house is to get pre-approved by a mortgage lender. A good loan originator will thoroughly assess your situation and provide you an amount for which you qualify. Here are a few things a loan originator will look at to assess how much you can borrow to buy a house:
- Job stability
- Current debts
- Debt payment history
- Property and assets
In addition to ensuring you have adequate funds available for a down payment, your lender will examine your current and expected monthly debt payments in relation to your income (they’ll probably refer to this as your “debt-to-income ratio”) and whether you’ve managed your current payments responsibly. Not overextending yourself is another way of saying you can afford a house.
Please understand that how much you qualify for is a different question than how much house you can afford. In many cases you will qualify for more than you think you will. It can become tempting to max out your payment because you qualify for it. Having a house payment that is comfortable and not a monthly burden is crucial to the long-term joy of being a homeowner. Just because you might qualify for a higher loan/payment doesn’t mean you should do it.
Down Payment Options and Requirements (With or Without Putting Cash Down)
One of the first questions your loan officer will ask is “How much do you have saved for your down payment?” Of the four loan programs we’ll touch on in the post, two of them require down payments and two of them do not. Before you get too excited about not having to make a down payment, the no down payment options are only available if you meet certain criteria. Most homebuyers will be required to make at least a minimal (3 to 3.5%) down payment.
Of FHA, VA, USDA, and conventional mortgage loans, VA & USDA loans do not require down payments.
VA Loan Down Payment Requirements
If you are eligible for a VA loan, exploring VA as a home buying option is a must. VA loans are available to active duty military, reservists, and veterans who meet specific service requirements. VA loans typically require no down payment, and beginning in 2020, there is no limit to the amount you can borrow as long as you don’t have another outstanding VA loan.
If you already have a VA loan, plan on keeping it, and would like to buy a new home using VA, there may be a limit to how much you can borrow. In this case you might be required to make a down payment. Our VA Entitlement Calculator will compute your required down payment given your location, entitlement used, and new home purchase price.
USDA Loan Down Payment Requirements
A little known (but growing in popularity) loan option that doesn’t require a down payment is the rural development loan guaranteed by the USDA. Now, this might sound like you need to be buying a farm, but USDA loans are designed to help sustain and grow rural populations (smaller towns) to keep those areas populated and flourishing. Therefore, USDA terms are favorable, including competitive interest rates and no down payment.
USDA loans are not available to everyone. First, you must be buying in an eligible USDA area. There are more areas available than you might think, especially just outside many metro areas. The USDA website's lookup tool can determine if a specific house is in a USDA area.
There are also USDA income limits you must meet in order to obtain a USDA loan. USDA is allocated money by the federal government annually to fund this program. Therefore, the number of loans USDA can guarantee is limited. Income caps are in place to ensure USDA loans are going to homebuyers that need them. If you are a high earner or can afford a large down payment, USDA would rather you used more traditional financing so their funds can go to someone who needs assistance.
FHA Loan Down Payment Requirements
If you’ve read the last two loan options with disappointment because you are not eligible for either, good news: FHA loans are for everybody.
Generally, FHA down payment requirements are pretty straightforward. FHA allows only a 3.5% down payment when buying a new home. If you’re wondering what that means exactly, here’s an example:
$100,000 purchase price * 3.5% required down payment percentage = $3,500 required down payment
It’s that simple. Whatever your purchase price is/will be, multiply it by 3.5% (0.035) to determine how much you’ll need for your down payment. FHA loans are a terrific option if you’re ready to buy a home but don’t have time to save for the larger down payment required by conventional mortgage loans.
Conventional Loan Down Payment Requirements
The most basic of mortgage loans is the conventional loan. They are generally straight forward, and subsequently, the down payment options are pretty straightforward as well. Most conventional loan buyers put down between 5% and 20%. However, there are conventional loans available with as little as 3%.
Qualifying criteria can be more stringent on conventional loans when compared to the government loan programs (FHA, VA, USDA). Like any choice involving such stakes, consult with your loan officer, explore your options, and determine which program works best for you.
Down Payment Alternatives
In certain circumstances there may be alternatives to these down payment requirements. They won’t fit into everyone’s homeownership plans, but they are worth exploring if they might apply to you.
- Down payment as a gift
- Buying a home you are renting
- Buying a home from a family member
- Down payment assist programs
Can I Afford the Monthly Payment?
Choosing a mortgage loan based on down payment requirements is only part of the equation. What about your monthly payment? Monthly payments can vary wildly by loan type because of the ways the various loan programs insure/guarantee their loans for lenders.
The next step in answering “Can I afford a house?” is determining “How much house can I afford?”.