As a home buyer, one of the first things you need to think about is your budget. Knowing how much home you can afford can help you narrow your home search and keep your expectations realistic. When you ask your mortgage lender how much home you can afford, they’ll review your income, assets and credit.

After analyzing your financials, your mortgage lender will provide you with the potential cost of your monthly payments and break down the expenses involved. You’ll learn about your interest rate, closing costs and property taxes, as well as additional fees that are factored into your payments. Furthermore, your mortgage lender will help you figure out how much of a down payment you’ll need.

If you’re looking for an easy way to find out for yourself, check out our mortgage calculator. It will help you estimate how much house you can afford by determining the cost of your monthly payments. The more you play around with the mortgage calculator, the better your understanding of your budget will be.

There isn’t a single type of mortgage loan that’s superior to others or right for everyone. Because multiple programs may be appropriate for you, it’s crucial that you discuss your options with your mortgage lender. Make sure to ask your lender about the following types of loans:

Conventional Fixed-Rate Mortgages
A 30-year conventional fixed-rate loan is the most common type of mortgage loan. Because the term is so long, monthly payments are lower, and the fact that rates are fixed means that your interest rate will remain the same throughout the life of the loan. However, the longer the term of your mortgage the more interest you’ll pay on the loan. So, if you can afford higher monthly payments, it may be worth choosing a 15- or 20-year term.

Adjustable Rate Mortgages
Unlike fixed-rate mortgages, the interest rates of ARMs change over the life of the loan. If you choose to obtain an adjustable rate mortgage, your interest rate will increase or decrease as the market fluctuates after the fixed period expires. This means that your mortgage payments can be different each month, which can make budgeting a bit challenging. The good news is that there are caps on this loan type, which limit the extent to which your interest rate and monthly payment can increase both periodically and over the life of the loan.

FHA Loans
Borrowers who have lower credit scores, incomes and savings are more likely to qualify for Federal Housing Administration (FHA). FHA loans have lower credit score minimums and down payment requirements than most conventional loans. Yet, FHA loans do come with restrictions, and there are limits to how much money you can borrow. Additionally, you’ll be required to pay a mortgage insurance premium.

VA Loans
VA loans are backed by the U.S. Department of Veteran Affairs, so they’re only available to veterans, active service members, and their surviving spouses. VA loans tend to have lower interest rates and don’t require down payments. However, there are some restrictions and fees involved in these mortgages. Those eligible should expect to pay funding fees and have reserve funds available.

A credit score is a three-digit number that indicates to lenders how likely you are to be able to pay back the money you borrow. The higher your credit score, the easier it is to get a mortgage loan. However, you can still find ways to buy a home if you have bad credit – you just may have to pay more for your loan.

Each lender sets its own standards for what they consider an acceptable credit score. That’s why it’s vital that you ask your mortgage lender about credit qualifications early on in the process. If you have a good credit score, you also may want to ask your lender if you qualify for any special offers or lower interest rates.

Mortgage points (sometimes called “discount points”) are an optional fee that you can pay at closing to “buy” a lower interest rate and save on the overall cost of the mortgage loan. The cost of each mortgage point is equal to 1% of your total loan.For example, if you take out a $150,000 loan, you may have the option to buy mortgage points for $1,500 each at closing. Mortgage points are most beneficial for home buyers who plan on living in their home for a long time because they can save tens of thousands of dollars over their loan term.

Be sure to ask your lender when it makes sense to buy mortgage points and how much each point will lower your interest rate and what the maximum number of points you can buy is.

An escrow account is a type of neutral savings account that holds money for prepaid property taxes and insurance premiums. Escrow accounts, which are usually established during closing, are often required for government-backed loans and optional for conventional loans.

Ask your lender if you need an escrow account. If you’re required to have one, ask what options you have for paying for shortages and whether you can get a refund if you overpay. And, make sure you find out how much money you’ll need to hold in escrow.

It’s essential that you ask your mortgage lender about your interest rate to find out how much interest you’ll be paying on your loan. Your interest rate is determined by multiple factors, including your credit score, the location of the home you purchase, the size of your down payment and your loan type, term and amount.However, you should also ask your mortgage lender about the annual percentage rate (APR), because it provides insight into the full cost of borrowing money. The APR includes both the interest rate and the fees that the lender charges to originate the loan.

If you’re planning to obtain an adjustable rate mortgage, it’s also helpful to ask your mortgage lender about the adjustment frequency. Knowing what your adjustment frequency is will tell you how often you can expect your interest rate (and thus the amount of your monthly payment) to change.

A mortgage rate lock is an agreement between you and your lender that says your interest rate will stay the same until closing, regardless of market movements. Rate locks are important because they keep your loan costs predictable. When you get a rate lock, you don’t have to stress about finding a home immediately, because you know that your interest rate won’t increase.

Ask your lender about rate locks and how long they’re valid. Also, find out about current market rates (are they high or low?) and whether you should lock your rate. Some lenders will drop your interest rate if market rates decrease after you lock your rate, so be sure to check with your mortgage lender.

There is no set dollar amount of income you need to have in order to buy a home. However, your income does play a significant role in how much home you can afford. Lenders look at all of your sources of income when they consider you for a loan, including commissions, military benefits, child support and more.

Ask your lender how much income you need to buy a home and which streams of income they consider when they calculate your total earning power. Finally, ask your lender what documents you need to give them to prove your income, such as W-2s, pay stubs, bank account information and more.

Preapproval and prequalification are two processes that are often confused with each other.

Prequalification: During a prequalification, a lender asks you questions about your income, credit score and assets to give you an estimate of how large of a loan you can get. However, they don’t verify any of this information, which means that the number you get during prequalification can easily change if you report incorrect information.
Preapproval: During a preapproval, your lender verifies your income, assets and credit information by requesting official documents, including your W-2s, bank statements and tax returns. This allows your lender to give you an accurate mortgage loan figure.
Ask your lender about the difference between prequalification and preapproval, because it often doesn’t mean the same thing. Then, ask which one is right for you. The answer will change depending on how serious you are about buying a home at the time you apply.

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Closing costs are processing fees you pay to your lender to close out your loan. Some typical closing costs include appraisal fees, origination fees, attorney fees and title insurance. The specific closing costs you’ll pay depend on where you live, your down payment and the size of your property. Closing costs will usually run 3% – 6% of the total value of your loan.