The paramount question for most of us when we consider buying or building a new custom Florida home is “How much can I afford to spend on a new home?”
Cost is almost always a factor, especially in today’s residential housing market, and we want to make the most of every dollar we spend.
If you’re wondering how much you can afford to spend on a new home, we at ICI Homes are happy to provide some guidance, particularly for buyers applying for a mortgage.
Only you can set your home-building-or-buying goals, budgets, and financial parameters, but four decades-plus of building new custom homes throughout Florida — and working with potential customers like you — has yielded tons of helpful, practical experience.
One such tip is understanding three important home-buying ratios and their relationship to affordability. All play roles in how mortgage lenders decide whether to approve a mortgage application and for how much.
Per Merriam-Webster, the definition of ratio is, “the relationship in quantity, amount, or size between two or more things.”
Read on for more, but first save this link for more blogs in our finance series.
Loan-to-value ratio
This is the purchase price of your new custom Florida home relative to the amount of your mortgage. Eyeing a $250,000 home? That’s the amount you’ll likely request on your mortgage application. As a buyer, you can create a favorable ratio between the two amounts by making a solid down payment.
Mortgage lenders prefer a minimum 20 percent down payment at closing, which is the industry standard and a smart option for buyers. Why? Putting down 20 percent means you’ve created a favorable loan-to-value ratio — immediately knocking out 20 percent of your mortgage amount — and that makes mortgage lenders happy!
It should make buyers happy, too. The higher your down payment, the higher-priced home you can afford.
Housing ratio
Mortgage lenders also evaluate how much of your total annual income will go to paying your housing expenses. Plainly put, this ratio asks if you can afford each month’s mortgage payment over the life of the mortgage.
The mortgage application process takes the purchase price of a home and breaks it down into monthly payments that include principal and interest, taxes and homeowners insurance. Using your annual income as a backdrop, mortgage lenders can see whether these monthly payments for your requested loan amount are doable, or might raise questions.
Debt-to-income ratio
This ratio examines your total debt along with the housing expenses you’ll incur with your mortgage.
All three ratios are a gauge for mortgage lenders in evaluating loan applications. For example, the higher your annual income, the easier you can afford monthly mortgage payments and create a favorable housing ratio above.
The debt-to-income ratio also is one that buyers can really influence. If you know you’re ready to buy a new custom Florida home, you can began attacking any existing debt well before you begin your search. Then you’ll be well on your way to affordability — and favorable lending ratios.
