Knowing how much you can afford to pay is a crucial step in your search. Nailing down your budget early will make the overall process more focused and less stressful. Here’s a good way to figure out how much you can afford: The 28/36 Rule.
The 28/36 rule is an established benchmark used by many lenders to determine how much credit to offer you. Here's how it works:
The "28" refers to the notion that no more than 28 percent of your gross monthly household income should go toward housing costs, which include mortgage principal, interest, taxes and insurance. To calculate, simply multiply your gross monthly income (amount before taxes) by .28. Use this amount as a guide for how much house you can afford.
Example: You earn an annual salary of $70,000. Divide 70,000 by 12, giving you a monthly gross income of $5,833. Multiply that by .28, and you'll find you should spend no more than $1,633 each month on total housing costs.
The "36" part of the 28/36 rule refers to your overall debt, which shouldn't exceed 36 percent of your income. This is important to consider because other high monthly debt loads – such as car and credit card payments – impact the amount you can afford to spend on housing. For first-time home buyers, the tricky part is knowing how much to budget for taxes and insurance. A Guillory Group associate can help with this.
Over more than 15 years, our broker Michica N. Guillory has worked for several of commercial real estate's largest industry leaders including CB Richard Ellis (CBRE), Transwestern Retail, Jones Lang LaSalle, Insignia ESG and others. During her time with those companies, and on her own as an independent broker, she has had the pleasure of negotiating, renewing or administering lease contracts for a variety of global corporations, national franchises and even government entities. These are just a few of those clients. References are available upon request.
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Most credit scores – including the FICO score and the latest version of the VantageScore – operate within the range of 301 to 850. Within that range, there are different categories, from bad to excellent.
Excellent Credit: 750+
Good Credit: 700-749
Fair Credit: 650-699
Poor Credit: 600-649
Bad Credit: below 600
But even these aren’t set in stone. That’s because lenders all have their own definitions of what is a good credit score. One lender that is looking to approve more borrowers might approve applicants with credit scores of 680 or higher. Another might be more selective and only approve those with scores of 750 or higher. Or both lenders might offer credit to anyone with a score of at least 650, but charge consumers with scores below 700 a higher interest rate!
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There are many different credit scores available to lenders, and they each develop their own credit score range. Why is that important? Because if you get your credit score, you need to know the credit score range you are looking at so you understand where your number fits in.
The Credit Score Range Using Various Scoring Models:
FICO Score range: 300-850
VantageScore 3.0 range: 300–850
VantageScore scale (versions 1.0 and 2.0): 501–990
PLUS Score: 330-830
TransRisk Score: 100-900
Equifax Credit Score: 280–850
With all of the scores listed above, the higher the number the lower the risk. That means consumers with higher scores are more likely to get approved for credit, and to get the best interest rates when they do. And they are more likely to get discounts on insurance. What is considered a “high” score depends on what type of score is being used.
Get pre-approved for a mortgage! Your lender can approve you for a certain loan amount prior to your home search. This gives allows you to shop for homes in your budget. Need help finding a lender? Ask any of our expert associates for help!
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