Before starting your search for a new home, it is important to consider how much house you can afford. Why is this important? Because if your “outgo is more than your income, your upkeep is your downfall!” Any of us can let our desires exceed our ability to make payments and keep up with our giving and living needs.
The scripture deals directly with this potential issue for all of us. “For which of you, intending to build a tower (house), sitteth not down first, and counteth the cost, whether he have sufficient to finish it?” (Luke 14:28 KJV). According to the Word we must make sure we can afford the house we want to purchase or build.
The first and most important thing begins with the mortgage rate. The higher the mortgage rate the higher your payment will be for any property you purchase. And the lower the rate of mortgage, the more house you can afford with the same payment. Presently the rate for home loans are at the lowest in history. So, it is an excellent time to build, purchase or relocate. The mortgage rate has hit an all-time low during COVID-19 and the Fed rescue of our economy. The average rate for 30-year fixed mortgage at this writing is 2.98 percent, the lowest since 1971!! For many, now is the time to step out and buy or upgrade your home purchase.
The second most important component is the history of paying your bills on time. It is critical that you have paid all of your bills on time when you are looking for a loan to purchase or build a new home. Any late payments will negatively impact your credit score. The higher your credit score, the lower your mortgage rate will be, which in turn allows you to purchase more home for the same payment. The lower your credit score, the higher your mortgage rate, and you may not be able to afford the home you want. If your score shows a consistent habit of not paying your bills on time, you may not find a mortgage company who will take the risk of loaning you the needed funds.
The third most important component is to prove you have consistent employment and income. Any mortgage company loaning you money for a home will look at the likelihood of you repaying that loan. Even if you have impeccable credit, when you borrow you still have to prove your income is enough to cover the monthly mortgage payments. To measure this ability, a lender will require that you have proof of employment and consistent income.
The fourth component is how much of a down payment do you have? In other words, how much “skin in the game” do you have? The minimum required for a down payment varies according to who provides the money for your loan and the type of mortgage. Putting at least 20% down will increase your chances of getting approved for a mortgage at the lowest rate. It will also allow you to avoid mortgage insurance.
Many conventional mortgage companies usually require at least 5% down. For government-backed mortgages, like FHA, it can be as little as 3% to 3.5%. VA loans, which are backed by the U.S. Department of Veterans Affairs, usually do not require a down payment. USDA loans, backed by the U.S. Department of Agriculture’s Rural Development Program, also have no down payment requirement. But always remember, the more money you place on your down payment, the lower your monthly payment will be and the more home you can afford.
The fifth and final decision is how much payment you can afford while you continue to live and give? There is a “28/36 rule” that states a household should spend no more than 28% of its gross or total income on a house loan. And you should have no more than 36% of your income in total debt, including housing-related expenses AND other recurring debt such as credit cards and car loans.
Many banks and credit unions offer online mortgage calculators you can utilize to discover a good number for your situation. Or, you can visit online financial resources such as nerdwallet.com or daveramsey.com.
A home is a big expense, but it also has benefits. You can deduct your mortgage interest and property taxes to save money at tax time. Also, you build your personal wealth every time you make a payment to your principal balance, securing your future to own your home debt-free during your retirement years.
Never forget… “For which of you, intending to build a tower (house), sitteth not down first, and counteth the cost, whether he have sufficient to finish it?” (Luke 14:28 KJV)
Steve Drury
Stephen Drury is the founding President of United Pentecostal Foundation and United Pentecostal Church Loan Fund. He is retired from directing The Stewardship Group serves in a consulting role. He is also co-founder of LifeSprings.