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MORTGAGE KNOWLEDGE CENTER

PenFed Mortgage with Confidence

Home Buying Steps

  • Getting Started
  • Finding a Home
  • Getting a Mortgage
  • Home Ownership

Mortgage Topics

  • VA Loans
  • Conventional Loans
  • First Time Homebuyer
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image

CONVENTIONAL LOANS

Rates starting at % (APR %)¹

 

Apply before becoming a member.

After your application, we’ll help you:

1. Discover you’re eligible to become a PenFed member

2. Open a Savings/Share Account and deposit at least $5

  1. Home
  2. Mortgage Knowledge Center
  3. Can I Afford to Buy A Home?

MORTGAGE

Can I Afford to Buy a Home?

What you'll learn: If you are financially ready to buy a home and how much you can afford

EXPECTED READ TIME: 5 MINUTES

November 9, 2020

For many, owning a home is the American dream. Some who envision themselves in their own home are looking at years’ worth of savings and preparation to make that dream a reality; others may be surprised that they can already afford to buy a home. In general, most people will need to do research and some additional work to get their finances or income lined up with the cost of home ownership. The answers to some key questions can help you answer the larger question of whether you’re financially ready to buy a home.

What Is a Home Affordability Calculator?

When you kick off the home-buying journey, lenders will look at a variety of factors to understand how ready you are to purchase a home, and that you are ready to make the required monthly payments. Before getting too deep into the process, make sure that you have a general understanding of what you can afford. A great place to start is by using a home affordability calculator with your financial particulars as inputs. 

The PenFed home affordability calculator asks you to input your annual income. You can use combined income if purchasing with a co-buyer or spouse. It also asks for your ongoing monthly debts. You'll need to account for car payments, credit card payments, and home equity or other loans you may have to get a handle on your overall debt. You'll also need to enter a projected down payment, as well as the term of your loan. The term is the length of the loan; typical terms are 15, 20, and 30.

We entered the following into the PenFed calculator:

  • Assumed an annual salary of $75,000
  • Monthly debts of $1,000
  • Down payment of $10,000
  • A term of 30 years.

The output is something you can manipulate in terms of how aggressive a loan you want to take. The mid-range output, using the above assumptions, indicates that a home costing $294,000 is within reach in the above scenario. 

If we keep the annual salary and the monthly debt the same, but reduce the down payment to $5,000, with a 30-year term, the total displayed drops to $289,000. This gives you an idea of how you can play with the inputs and see how modifications to the numbers can change the projected amount that you can afford.

This sort of calculator is a great way to begin your research and may help you realize that buying a home might be within your financial reach even sooner than you think. However, there are a lot of variables that go into the final home buying and approval equation. Next, we'll review some key considerations you should factor in.

How Important Is My Credit Score When Buying a Home?

Notice that credit score wasn't part of the equation when we used the affordability calculator with the above financials. However, you really can't get a mortgage without a good understanding of what your credit score is, and ultimately how important that may be for obtaining your loan. Assume two different people have the exact assumptions laid out above for salary, monthly debts, and down payment. If one person has a great credit score, and another has a terrible credit score, the person with the terrible credit score might need to improve their credit before obtaining approval for a mortgage loan.

There are many ways to improve your credit score if you need to, and it's always good to stay on top of what the credit agencies are reporting about your credit, regardless of the competitiveness of your score. It's not uncommon for there to be errors in the agencies’ reporting, and it's ultimately your responsibility to ensure the reporting data is correct. Understanding your credit score and creditworthiness is something you should embark upon early in your home buying process. This will allow you to make corrections and improve your score over time, should you need to.

How Does Debt to Income Ratio (DTI) Affect My Homebuying Power?

DTI is used by lenders to better understand your ability to afford a home. If you're looking to buy a home, it's a good idea to pay off as much debt as possible before applying for a mortgage. Not only will this improve your credit score, but it will also reduce your DTI. Monthly expenses like gym memberships, utilities, and even insurance are not included in DTI calculations. Be aware that most lenders will not even consider anyone with a DTI higher than 43%.

How to calculate DTI:

  • Add up your monthly expenses, including car payment, credit card(s), rent, and school loans.  Let's pretend as an example the amount comes to $1,500 total.
  • Assume $5,000 monthly income (before taxes) for this example.
  • Your DTI is your expenses ($1,500) divided by your gross income ($5,000) = $1500/$5000 = .3 or 30%. 30% is a good DTI.

How Much of a Down Payment Do I Need to Buy a Home?

The amount of down payment you need depends on several factors. One is the type of mortgage loan you get. For example, if you are eligible and apply for a VA loan, you might not need a down payment at all. Some other loan types require 3-5% as a minimum. Typical guidelines recommend 20% as your target down payment.

Down payment — as we saw in the home affordability calculator — can come into play in the overall purchase process in several ways. First, if you put less than 20% down on most loans — excluding a VA loan — you'll need some type of mortgage insurance. This is a monthly fee, usually paid with your mortgage, that protects the lender. Another way a down payment can factor in is if you are placing a lot of money down. While not as common, having a large percentage of the home price as a down payment reduces the risk for the lender, which makes the buyer more a more attractive candidate for a loan. 

How Important Are Interest Rates in Determining What I Can Afford?

Mortgage interest rates fluctuate over time with the market. In the 1980s, interest rates were well over 10%. In recent years, interest rates have been around 3% and even lower. There are ways to reduce your interest rate via different loan types, such as adjustable rate mortgages (ARMs). Another way to reduce your interest rate is to pay "points" at closing. A point is 1% of the total loan. Paying points at closing can help you reduce your overall rate for the length of the loan.

The biggest takeaway is that taking a serious look at your finances and starting to prepare when you first thinking about buying a home can help you to understand all of your options and get the best loan for the home that fits your lifestyle and financial situation. You might find that need to spend some more time getting your finances in order, or you might learn that you are ready to buy now. 

For more information about PenFed Mortgages:
 

PenFed Mortgage: 

800-970-7766

Get Started

SIMILAR ARTICLES

Homebuying Process Step-by-Step

In home buying, it's important to understand everything that's involved. Follow PenFed Credit Union's step-by-step process before you step into your new home.
Couple discussing buying a home

Buying a Home Checklist — Part 1

PenFed Credit Union continues to help our members by providing a checklist for buying a home, including the costs and needs associated with homeownership.
Woman writing and sitting with moving boxes

Buying a Home Checklist — Part 2

PenFed Credit Union continues educating members with the first steps to buying a home, including how to make an offer on a home and finding the best real estate agent.
house with porch image

10 Reasons Why You Should Get a VA Loan

The benefits of a VA Loan can be a great option for military families and veterans. Learn about the reasons why you should get a VA Loan from PenFed Credit Union.
military personnel being handed keys to new home
image

CONVENTIONAL LOANS

Rates starting at % (APR %)¹

 

Apply before becoming a member.

After your application, we’ll help you:

1. Discover you’re eligible to become a PenFed member

2. Open a Savings/Share Account and deposit at least $5

Home Buying Steps

  • Getting Started
  • Finding a Home
  • Getting a Mortgage
  • Home Ownership

Mortgage Topics

  • VA Loans
  • Conventional Loans
  • First Time Homebuyer
  • Home Equity
  • Homebuying 101
  • Checklists
  • Adjustable Rate Mortgages
  • PenFed Top 10
  • Refinance
  • Jumbo Loans
  • FHA
  • Videos

Mortgage Products

  • Mortgage Center
  • Refinancing
  • Home Equity

PenFed HELOC

Rates as Low as % APR* with flexible use of funds

Apply before becoming a member.

After your application, we’ll help you:

1. Discover you’re eligible to become a PenFed member

2. Open a Savings/Share Account and deposit at least $5

Disclosures

1Except for holidays, rates are updated Monday through Friday at 10:15am EST. The advertised rates and points are subject to change. The information provided is based on discount point, which equals percent of the loan amount, and assumes the purpose of the loan is to purchase a property with a 30-year, conforming, fixed-rate loan. Loan amount of $400,000; loan-to-value ratio of 75%; credit score of 760; and DTI of 18% or less. The property is an existing single-family home and will be used as a primary residence. The advertised rates are based on certain assumptions and loan scenarios, and the rate you may receive will depend on your individual circumstances, including your credit history, loan amount, down payment, and our internal credit criteria. Other rates, points, and terms may be available. All loans are subject to credit and property approval.

*Prime Rate is % as of . The APR for this Home Equity Line of Credit (HELOC) is based on prime plus a margin and can change monthly. Fixed Rate Advances will be amortized over the Fixed Rate Advance Term, with the payment consisting of principal and interest. Your Annual Percentage Rate for a Fixed Rate Advance will be calculated by adding your Prime Rate, your Margin, and the Additional Fixed Rate Lock-In Margin. Your Annual Percentage Rate for a Fixed Rate Advance shall not exceed 18% and shall be equal to or greater than % for primary residences and second homes.

  • Annual Fee: Notwithstanding the foregoing, an annual fee of $99 will be assessed on each account anniversary.
  • Home equity lines of credit (HELOC) are variable rate loans and the interest rate is subject to increase after consummation of the loan on monthly basis. Closing costs range between $500 and $8,500 for credit lines of $500,000. Contact a representative for additional details.

Appraisals: PenFed will attempt to establish value via an independent method. If that method is unsuccessful, or the value is not sufficient for the amount requested, an appraisal will be required regardless of CLTV. An appraisal is always required in the following circumstances:

For all loans with a loan amount greater than $400,000.

If an appraisal is required, it must be ordered by PenFed. You will be contacted for authorization and payment prior to ordering. Appraisal fees average $550 to $850 (some run higher).

  • Closing Cost Credit: PenFed will pay most closing costs associated with a home equity line of credit (HELOC), which includes credit report, flood certification, settlement/closing, property ownership and encumbrances search, recording, property search, and quick close. Member is responsible for any city, county, and/or state taxes if the subject property is located in FL, LA, MD, MN, NY, TN, or VA. If an appraisal is required, the member, who is responsible for the fee whether or not the loan closes, will pay the cost.

Interest may be tax deductible, consult a tax advisor for further information regarding the tax deductibility of interest and charges.

Fixed Rate Advance Lock-In You may lock in an Annual Percentage Rate for Advances during the Draw Period. During your Draw Period, you may choose to have three separate Fixed Rate Advances locked in at any one time, with a maximum of two new Fixed Rate Advances per calendar year. Each Fixed Rate Advance must equal or exceed Ten Thousand Dollars ($10,000.00) and you may not request a Fixed Rate Advance that would cause the amount you owe to exceed your Credit Limit. The only term option for your Fixed Rate Advance is 240 months (“Fixed Rate Advance Term”). However, the term of your Fixed Rate Advance cannot exceed your Repayment Period.

Fixed Rate Advances will be amortized over the Fixed Rate Advance Term with the payment consisting of principal and interest. Your Annual Percentage Rate for a Fixed Rate Advance will be calculated by adding your Prime Rate, your Margin and the Additional Fixed Rate Lock-In Margin. Your Annual Percentage Rate for a Fixed Rate Advance shall not exceed 18% and shall be equal to or greater than % for primary residences and second homes and 4.75% for investment properties.

Property Insurance: Property insurance is required.

Multiple PenFed Loans: Multiple PenFed Equity loans and HELOCs are available as long as the member and collateral qualify (except Texas). For Equity loans and HELOCs the total indebtedness cannot exceed $500,000 for all PenFed Equity and HELOCs combined.

PenFed does not lend on:

  • Mobile homes
  • Co-ops or time-shares
  • Properties that are currently listed on the market for sale
  • Commercial property or property used for commercial purposes, even if a residence is part of the property
  • Undeveloped property (land only)
  • Properties with more than 4 units

Properties that are currently under major construction/renovations: Property must be fully livable, with no safety issues. (Examples: no missing rails from stairs/decks, no open walls with wires showing, missing kitchen appliances/counters, missing bath fixtures or unfinished pool).

  • Additional limitations may apply

Home Equity Line of Credit:

  • This Account has a Draw Period of 10 years, followed by a repayment period of 20 years.
  • If only minimum payments are made during the draw period, the loan balance will not decrease.
  • In Texas, the maximum CLTV available is 80% on owner occupied properties. Additional restrictions apply in Texas, so please ask a representative for details.
  • In all other states, the maximum CLTV is 85% on owner occupied properties and second homes. Additional restrictions or requirements may apply based on application characteristics.
  • Property type of Condo has a maximum CLTV of 80%.
  • The maximum CLTV available is dependent on credit qualification.
  • Rates vary depending on owner occupancy and CLTV and other loan criteria.

Minimum Loan Amount Requirements in all States:

  • For an owner occupied property or second home the minimum loan amount is $25,000 and the maximum amount is $500,000 with a CLTV of 85% or less of the fair market value.

Other terms and conditions apply; call 844-918-4307 to speak with a representative for details. All rates and offers are subject to change without notice. To receive advertised product, you must become a member of PenFed.

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This credit union is federally insured by the National Credit Union Administration. Rates are current as of December 2023 unless otherwise noted and are subject to change.

APY = Annual Percentage Yield
APR = Annual Percentage Rate


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You are leaving PenFed.org and entering a third party Website that is not a part of Pentagon Federal Credit Union.


The content you are about to view is produced by a third party unaffiliated to Pentagon Federal Credit Union. PenFed takes no responsibility for the content of the page.


IMPORTANT NOTICE

You are leaving PenFed.org and entering a third party site. PenFed Realty, LLC is wholly owned by PenFed and this referral may provide PenFed a financial or other benefit.


For more information about the relationship between PenFed and PenFed Realty, LLC, see the Affiliate Business Arrangement Disclosure.


IMPORTANT NOTICE

You are leaving PenFed.org and entering a third party Website.


The content you are about to view is produced by a third party website that is unaffiliated to Pentagon Federal Credit Union. PenFed takes no responsibility for the content of the page.


IMPORTANT NOTICE

You are leaving PenFed.org and entering a third party site. PenFed Title, LLC is wholly owned by PenFed and this referral may provide PenFed a financial or other benefit.


For more information about the relationship between PenFed and PenFed Title, LLC, see the Affiliate Business Arrangement Disclosure.


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