According to a recent study, 32.6% of Americans rent their homes, whereas 67.4% of American adults own their homes. These numbers reflect that homeownership has been increasing over the past few years, especially outside metropolitan areas and in the Midwest.
If you want to become a homeowner but don’t want to commit to a full house, you can always buy an apartment instead. Here’s how to get ready to buy your first apartment.
What affects your mortgage budget?
Your apartment mortgage budget depends on your household income, your monthly debts such as loan payments, and your savings. A good rule of thumb for saving toward an apartment purchase is to have at least three months of payments ready. You should also save money that covers your other monthly debts. After all this saving, you may be able to afford a larger down payment, thereby increasing your mortgage eligibility.
How do banks determine your mortgage eligibility?
If you can afford a larger down payment on an apartment, lenders can offer you better mortgage rates and make sure you have more equity for your home. Your loan-to-value ratio, or LTV, depends on your down payment. A large down payment will give you a lower LTV, meaning the lender will assume less risk.
However, it’s possible to buy an apartment with a low down payment and refinance into a lower rate loan in the future. If you decide to buy an apartment with a low down payment, try to improve your finances and credit score as much as possible so you are eligible for refinancing. After refinancing, you can get lower monthly mortgage payments.
What are FHA and VA loans?
A mortgage loan that’s insured by the Federal Housing Administration is also known as an FHA loan. A mortgage loan that’s backed by the Department of Veterans Affairs is called a VA loan, and it exists exclusively for people who are serving or have served in the U.S. military. Both FHA and VA loans are government programs that were created to help lend money to borrowers.
Typically, a down payment for an FHA loan is approximately 3.5 percent. However, if you qualify for a VA loan, you can sometimes get a VA loan with no down payment. People who meet the requirements for a VA loan can apply for new loans and refinance their old loans. Additionally, a completed Certificate of Eligibility is required with a VA loan.
How can you determine your mortgage budget?
You can determine your apartment’s mortgage budget in a few easy steps. First, calculate your monthly income, including all revenue streams such as investment profits, rental earnings, and alimony. Next, list your estimated housing costs and your total down payment. Include your estimated mortgage interest rate, annual property tax, homeowner’s insurance costs, and your loan terms. Lastly, carefully calculate your monthly expenses.
Most financial experts recommend that people should spend a maximum of 28 percent of their gross monthly income on housing expenses and no more than 36 percent on total debts such as credit card payments, student loans, and car expenses. This is called the 28/36 percent rule that is the basis for budgeting. Smart budgeting now can lead to a favorable mortgage in the future, and with good budgeting, you can own an apartment sooner than later.