Understanding affordability & your first steps to getting a loan
Navigating the market can be challenging. Listen to our webinar, and check out the resources below to help with your home-buying process.
Watch Now: Understanding affordability & your first steps to getting a loan — Hosted by Zillow Home Loans, our expert panel includes a seasoned loan officer, Jeremy Ellis, and a knowledgeable economist, Orphe Divounguy, who will share invaluable insights into understanding what you can afford and the crucial initial steps in the home buying process. Whether you’re a first-time buyer or looking to make your next move, this webinar aims to leave you feeling informed, motivated, and optimistic about your homeownership journey.
Affordability + financing: FAQ
What are the best tools to determine affordability?
BuyAbility, a new tool from Zillow Home Loans, is a great place to start to determine how much home you can afford. BuyAbility gives buyers a personalized, real-time estimate of the home price and monthly payment that fits within their budget. You just need to add a few simple inputs unique to your financial situation, like income and credit score, and your BuyAbility will pop up in seconds. You can get started with BuyAbility under the Home Loans tab in the Zillow app, or use the QR code above.
How much do I need for a down payment?
The typical down payment on a home is between 3% and 20% of the purchase price, but it can vary depending on the type of loan you go with. The typical buyer puts down between 10-19%, but 16% of buyers in 2022 put down just 3-5%. There’s no right answer, and it depends on your unique financial situation.
What are closing costs?
Closing costs are the fees and taxes you pay when you finalize the purchase of a home and they add between 2-5% to the purchase price. Some of the larger closing costs include things you’ll have to pay for anyway as a homeowner, like property taxes and homeowners insurance. But there are also other costs like recording the sale of the home and the cost of the appraisal that’s required by your mortgage lender.
Here’s a bit more info on closing costs and how to reduce them
What is Private Mortgage Insurance (PMI)?
Private Mortgage Insurance (PMI) protects the lender if you fall behind on your mortgage payments. If you put less than 20% down on a home, you’ll need to pay PMI. But, it’s usually removed once you hold 22% equity in your home. You can expect to spend between 0.22% to 2.5% of your principal loan amount on PMI. For example, if your loan amount is $300,000 and you have a PMI rate of 0.5%, your PMI would cost $125 a month. The cost is added to your monthly mortgage payment. Factors that impact your PMI rate include your credit score, your loan terms, your debt-to-income ratio and down payment amount.
What is DTI?
DTI is your debt-to-income ratio. Your DTI is the share of your gross monthly income that goes toward paying your debts. It’s used by mortgage lenders to determine your ability to make timely monthly payments and pay back the loan. The lower your DTI ratio, the more likely you’ll be able to afford a mortgage and get approved for a loan. A DTI of 20% or below is considered excellent, and a DTI ratio of 36% or below is considered ideal. Zillow Home Loans’ BuyAbility tool will calculate your DTI ratio for you. You can get started on the Home Loans tab in the Zillow app or through the QR code above.
Why should I avoid big purchases before getting a mortgage?
It’s true – you should avoid making big purchases before applying for a mortgage. Financing a big purchase, like a car, around the time you’re applying for a mortgage can impact your ability to get approved for a loan. That’s because the purchase will impact your debt-to-income ratio (DTI), increasing the amount of money you owe relative to how much money you bring in. Remember, a DTI ratio of 36% or below is considered ideal. The lower your DTI, the greater your chances of getting approved for a mortgage.
What credit score is needed to secure a mortgage?
A favorable credit score to buy a house is typically in the high 600s and 700s, with anything higher than that considered exceptional. However, some loan types will allow you to buy a house with a credit score as low as 500. It is possible to buy a house with a wide range of credit scores, but it’s important to remember that the higher your credit score, the lower the mortgage rate you’ll qualify for.
Related: Top questions to ask a mortgage lender & Is an adjustable rate mortgage right for you?
Related: Benefits of real estate agents for home buyers & Tips for hiring a buyer’s real estate agent