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You’re finally ready to get out of the rental market and buy a home of your own. But how do you know how much house you can afford?
Before you head out on your house-hunting adventure, you can easily do those affordability calculations yourself before you officially begin shopping for a mortgage.
Here are the top factors lenders typically consider when determining how much house you can afford.
Debt-to-income ratio
One of the first factors a lender will analyze is your debt-to-income ratio, or DTI.
Lenders use this measurement to ensure that you’ll have enough income to cover both your new mortgage payment and any existing monthly debts such as credit card, auto loan and student loan payments.
What is a good debt-to-income ratio? Generally most lenders want your debt-to-income ratio, including your anticipated new monthly mortgage payment, not to exceed 36 percent.
The ratio is calculated by taking your total monthly debt load and dividing it by your monthly gross income.
What does that mean in dollars and cents? Someone who earns $5,000 per month and carries $500 in monthly debt would have a DTI of 10 percent.
This borrower generally could be approved for a maximum monthly mortgage payment of $1,300, including property taxes, homeowners insurance and private mortgage insurance.
Someone making the same salary but carrying zero debt generally could be approved for a maximum monthly mortgage payment of $1,800.
Credit considerations
There are several key factors in securing a mortgage loan, and your credit is one of the most important elements.
Your credit scores is based on your payment history, overall level of debt, length of credit history, types of credit and applications for new credit.
If a traditional lender finds that your credit score falls within an undesirable range or includes unfavorable marks when they check your credit report, they might be leery of approving you for a loan.
You may be able to obtain a loan, but you’ll likely pay a higher mortgage rate, which will ultimately result in a higher mortgage payment.
Well before you apply for a home mortgage loan, pull your credit report to review where you stand, and research the requirements you need to meet with your desired lender.
Understanding your personal credit profile and the lender’s expectations will help you understand the interest rates you likely qualify for and the terms your loan will likely be.
Down payment requirements
With the exception of Veterans Affairs (VA) loans and some special programs for first-time buyers, a home purchase requires that you have some cash on hand.
How much? Anywhere from 3.5 percent of the sales price for a Federal Housing Administration (FHA) loan to as much as 20 percent for a conventional loan.
Expect to get a better interest rate if you’re able to make a down payment of at least 20 percent.
Keep in mind that the down payment amount doesn’t include closing costs, which are fees related to the purchase of the home.
Typically, buyers pay between 2 percent and 5 percent of the purchase price of the home in closing costs.
The big picture
If you have less-than-amazing credit, then you may want to consider waiting to purchase a home and making changes in your spending habits to improve your credit score.
Many experts suggest before you even consider buying a home, you should be debt-free and have three to six months of expenses saved — in addition to your down payment and closing costs.
“Being debt-free or close to it with some money in the bank is optimal,” said Tiffany Kjellander, owner and operations manager of Augusta, NJ-based EXIT Towne & Country Realty.
She adds, “It can be tough to hear that it’s not the right time for you to look for a house, but the truth is that getting your financials in order and putting some money in the bank could keep you from losing your home if you get sick or lose your job down the road.”
Further, Kjellander advises that potential homeowners think long term.
The cost of homeownership extends beyond the monthly payment and includes routine maintenance and repairs, homeowners association dues and additional utilities that you might not have paid while renting.
“Just because you’re approved to spend $3,000 per month on a house doesn’t mean you have to go that high,” she said. “Buying a home is a huge financial decision. No one should enter into it blindly.”
“How Lenders Determine How Much House You Can Afford” was provided by Zillow.
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Moving into your first apartment = a major adulting achievement.
But before applying for your future spot, you’ll need to get a few things in order. And no, we don’t mean going down the Pinterest rabbit hole of new home décor.
Get together the three key numbers that matter to your financial health, so you can know how lenders may view you, and which apartments you can qualify for. Most Americans move between May and September, meaning it’s a pretty competitive space for renters. Turbo Tip: landlords predominately favor detailed, lease applications that showcase a complete picture of your financial health so they are confident in choosing the best applicant.
So in order to stay ahead of the competition (and set realistic apartment goals), here are the 3 key numbers you need to know.
Credit Score
Your credit score is a BIG factor landlords look at when considering your application. Your credit score is more than just a number—it represents how financially reliable you are and how well (or poorly) you manage your debt. Depending on where your score falls on the credit score scale (which runs between 300 and 850), this might be a make-or-break for your dream apartment. Not sure what your credit score is? It’s easy to get a free credit score report from Turbo!
If you’re working on improving your score or building credit for the first time, the good news is that many landlords accept co-signers. A co-signer is a person who is obligated to pay your rent if you can’t. If you plan on using a co-signer, make sure you know his/her credit score and have the #RealMoneyTalk on financial responsibilities before signing a lease.
Verified Income
With rent prices on the rise, landlords need proof to ensure you’re able to make the allocated payments each month. You can show proof of your verified income through bank statements, pay stubs, or job offer letters. Pro Tip: on average, housing often eats up 25-33% of your yearly net income. So before you set your rent pricing parameters on Zillow or Craigslist, be sure to do the math.
Debt-To-Income Ratio (DTI)
While not all landlords may ask for your DTI ratio, it is a key financial health indicator that shows if you’re living within your means. What is a good debt-to-income ratio? Lenders typically like to see 36% or less, but your landlord may have differing standards. You might be tempted, especially if you’re starting a new job, to upgrade your living arrangements and lifestyle to be in line with your increased income, but try to avoid this temptation at all costs!
Find a roommate to split the costs of housing, rent a cheaper apartment, or live in a less affluent area. If you can save even a hundred dollars a month on rent, that’s more money you can put towards paying off your debt.
Additionally, when submitting your application for a new apartment, renters may also ask for your ID (either your license or passport), Social Security Number, past rental history, a reference, and a check for the deposit (typically last month’s rent).
Now that you’re ready to rent, get your numbers with Turbo today so you can see where you truly stand financially. The Target household items section is waiting!
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All rights reserved. Intuit and QuickBooks are registered trademarks of Intuit Inc. Terms and conditions, features, support, pricing, and service options subject to change without notice.
All rights reserved. Intuit and QuickBooks are registered trademarks of Intuit Inc. Terms and conditions, features, support, pricing, and service options subject to change without notice.
All rights reserved. Intuit and QuickBooks are registered trademarks of Intuit Inc. Terms and conditions, features, support, pricing, and service options subject to change without notice.
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Winter means more time is spent indoors, and your heating bills go up. If you only prepare for the colder months by turning a dial or flipping a switch, then your’e doing your home and budget a disservice.
Every HVAC unit needs regular maintenance, such as cleaning and changing filters, and a yearly tuneup is also a good way to encourage efficiency.
But three common mistakes might cost you more than you should pay to keep warm until spring arrives again.
Warm Rooms at Night May Cost More than Money
Almost everyone wants a warm, cozy home when the temperature dips outside, but a too-warm home at night can cost you sleep as well as extra money.
The National Sleep Foundation says that although experts disagree on the precise temperatures that are best and worst for sleep, they do agree that a cooler bedroom is conducive to more restful sleep.
When it’s time for bed, turn down the thermostat to a setting that’s noticeably cooler than in the daytime.
This doesn’t mean you have to be cold; wear warmer pajamas and use quilts to keep chills at bay. You’ll not only save energy and money on wintertime heating bills, but you’ll also sleep better.
A Space Heater Isn’t Just a Space Heater
There are two kinds of space heaters, explains the Washington Post. Convection heaters, such as oil-filled electric radiators and ceramic heaters, take longer to warm a room, but they’re fairly efficient.
Radiant heaters are the kind that glow hot and sometimes blow warm air into the room. They give fast heat in a small space, but aren’t the most efficient if you need to use them often.
Pick the wrong one for your needs, and your bills may go through the roof.
To warm a room that has insufficient ductwork, a convection heater such as an oil-filled radiator might be a great choice.
Once the oil heats up, the heater can cycle off for a while because the oil holds the heat. But if you need quick heat and won’t need it for long, the time it takes for the oil to warm can use more electricity than you’d like.
A radiant space heater uses electricity continually while it’s glowing or blowing out heat, so long-term use isn’t as efficient.
But unlike a convection unit, the space warms quickly, which might be better for short-term use, such as warming up a reading nook for an hour.
Less HVAC is Sometimes More
If one HVAC unit is plenty to heat your home in winter, then a more powerful unit must be better, right? Not usually. It’s smarter to buy the right-size unit for your home and climate.
When you install a unit that’s more than you need, you’ll pay a lot more on the front end. But you’ll also pay more down the road.
This Old House explains that an oversize unit cycles on and off more frequently, so parts wear out faster. Frequent cycling also reduces the appliance efficiency, so you’ll consume more energy.
Instead of using the “bigger is better” mindset, choose a professional HVAC installer who will not only consider the climate where you live and the size of your home, but also the efficiency of your home at reducing heat transfer.
Heat transfer means how much heat escapes in winter, or enters in summer. Your HVAC unit should be just enough to meet the demands on the coldest day of your usual winter, and no more than that.
Heating and cooling demand a lot of the appliances that you choose, and of your bank account. So if you’d rather stay comfortable while saving money, you’ll need to do some homework.
No one wants to be uncomfortably cold in order to save a few dollars. With the right approach and the best appliances for your needs, you won’t have to.
Mary Hiers is a personal finance writer who helps people earn more and spend less.
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If there’s one thing in life to always bank on, it’s to expect the unexpected. While we like to think we have everything figured out, it’s hard to predict when certain events will occur. Whether it’s an accidental fender bender in stop-and-go traffic, a crushed roof from a fallen tree branch, or an unanticipated medical emergency, having the right insurance coverage might save you time, money, and headaches.
One insurance coverage policy that may be worth investing in is renters insurance. Pew Research Center found that more people are renting today than at any point in the past 50 years. This study also found that certain demographic groups, such as those with lesser education, young adults, and non-whites, are more likely to rent than other groups. With more renters on the market than ever before, it’s important to consider the various financial protections renters can take advantage of.
If you’re living in a rental property and want to ensure you, your belongings, property, and guests are covered from any unforeseen circumstances, continue reading our guide to renters insurance coverage below.
What is Renters Insurance?
Renters insurance is a form of risk management that protects you and your property, and generally provides legal defense fees and medical costs for anyone who may become injured on your rented property if you are found at fault. Renters insurance is like most insurance policies, such as home and auto insurance, where you buy a policy and make recurring payments. Then, if anything were to happen, such as a burglary, you can make a claim, and your renters insurance will provide a certain level of compensation for the stolen items.
What Does Renters Insurance Cover?
If you’re wondering, “What does renters insurance cover?” the answer is, quite a lot, depending on the coverage you select. From vandalism to explosions and everything in between, renters insurance coverage may give you peace of mind knowing your valuable items are protected.
Personal Property
You can never predict when disaster strikes. Your roof caves in after a blistering snowstorm, freezing you out of your home. You run down the street to get some groceries and return to find your apartment was ransacked. Or, a clueless driver plows right through your living room. It’s either happened to you or someone you know and while sympathy can ease some of the pain, usually money is the only way to replace valuable items like furniture and electronics. That’s where renters insurance coverage comes in handy.
Here’s a list of some events where a renters insurance policy might have tenants covered:
Theft: If someone breaks into your house and steals your personal property, such as your laptop, cash, or other items, your renters insurance may cover you once you pay your deductible. Renters insurance doesn’t only cover items in your home either. If you go on vacation and get pickpocketed, or someone breaks into your car while shopping at the mall, you can file an insurance claim for those losses as well.
Vandalism: If someone breaks into your home and decides to destroy your property with mischievous intent, you can file a claim to get reimbursed. So, if the neighborhood kids decide to drive by and smash your mailbox with a baseball bat, your renters insurance policy will have your back.
Fire, windstorms, lightning, hail, or volcanic eruptions: Basic renters insurance may cover damage inflicted by fire, windstorms, lightning, hail, and even volcanic eruptions. If a flash storm rolls through during the summer and your home gets struck by lightning, many of the damages might be covered.
Smoke: While fires are covered under renters insurance, so is smoke. Sometimes, smoke can damage your personal property without a fire even being present. For example, if you live in an apartment complex and a neighboring unit catches on fire and smoke seeps into your apartment, your renters insurance coverage can help with smoke-related damages.
An aircraft or vehicle that’s not your own: Unfortunately, if you happen to drive your car into your home, renters insurance usually won’t cover the expenses. However, if another driver or an airplane crashes into your apartment, renters insurance might come to the rescue and pay for damages that are covered within your policy.
Snow, ice, or sleet collapse: While it’s a good practice to shovel snow off of your roof, sometimes it’s extremely difficult or impossible. If heavy snow, sleet, or ice causes your roof to collapse, your renters insurance policy can help cover replacement costs for damaged items.
A short-circuit: A short-circuit is when an electrical device malfunctions or fails. A short-circuit can cause a variety of problems, such as a damaged TV or appliance. And, if your power goes out and all of your food in your fridge and freezer spoils, you can file a claim to cover the cost of your perished food.
Water or steam overflow: You never know when a pipe will burst, and when it does, it can lead to all sorts of problems. Rest assured knowing your renters insurance policy may cover damages that result from water or steam overflow.
Frozen plumbing: Sometimes, the sheer cold is strong enough to freeze the water in plumbing and HVAC systems. Then, if you try and run hot water, the frozen water can expand and may lead to a cracked piped, pouring water throughout your home. Some renters insurance plans may cover these damages. However, if you were away when the frozen pipe burst and you didn’t take necessary precautions to keep your home properly heated, you may be at fault and left with no coverage.
Water or steam-heating appliances: Additionally, any water damage from water or steam-heating appliances, such as your dishwasher or laundry machine, may be covered by your renters insurance policy.
Falling objects: Have you ever wondered what would happen if an asteroid came crashing through your home? If so, have peace of mind knowing your renters insurance coverage may take care of the destruction from falling objects such as fallen trees and space debris.
Riots: If a riot breaks out around your apartment and someone damages your personal belongings, your renters insurance coverage can help take care of the costs.
Explosions: Whether a transformer blew up or someone set off an explosive device that causes damage to the home you rent, your renters insurance policy may help pay for any of your items that were destroyed.
Other scenarios: Renters insurance may cover other scenarios as well. For example, Trulia explains how renters insurance can cover things such as waterbed leaks and even dog bites. Additionally, renters insurance can even cover bank or credit card forgery if a thief snatches your financial information from your home and decides to go on a spending spree.
Living expenses
The answer to the question, “What does renter’s insurance cover?” is not complete just yet. Let’s say, for example, a tree came crashing down in the winter, leaving a gaping hole in your home or apartment. You most likely won’t be able to live in your house, or you might freeze. If your place of residence becomes uninhabitable, renters insurance can help cover your living expenses while your rented home or apartment is under construction. These expenses include things such as hotel costs, groceries, and other incidental expenditures.
What Does Personal Liability Renters Insurance Cover?
A final area of expenses rental insurance covers is personal liability. Renters liability insurance may cover you if you are at fault for injuries that occur on your property. For example, if someone gets hurt on your property and decides to file a lawsuit, renters liability insurance might help pay for your legal fees, as well as medical expenses of the person who got injured.
Renters liability insurance may also cover the expenses of another person’s stolen or damaged property that happens in the home or apartment you rent. So, if you decided to borrow your brother’s laptop, and it was destroyed after a fire, a renters liability insurance might take care of the cost.
Ultimately, coverage can vary between insurance providers, so do your research and consider all of your options before selecting a renters insurance policy.
What Does Renters Insurance Not Cover?
While it may seem like renters insurance covers everything, there are a few things that are often not covered.
Personal belongings damaged from natural disasters such as earthquakes and floods: If you live in a high-risk area for natural disasters, such as Tornado Alley, along a river, or in a hurricane-prone area, you may need flood, earthquake, or other types of specialized insurance policies.
Theft or damage to your vehicle: While the valuables inside your car may be covered by renters insurance, any damage to your car, or theft of your car, is not typically covered. To insure your car, you might consider purchasing auto insurance.
Your roommate’s belongings: Unfortunately, your roommate won’t be able to freeload off your renters insurance plan. Instead, if they want their valuables covered, they will need their own renters insurance policy.
Damage caused by rodents and pests: Any damage from rodents such as bed bugs, mice, cockroaches, and other pests are often not covered by renters insurance.
High-value items like jewelry, antiques, and family heirlooms: If you have expensive items, such as antiques, high-end jewelry, or other valuable pieces, your renters insurance may not cover the cost if they’re stolen or damaged. Instead, you might consider purchasing additional coverage or buying a standalone policy.
Damages incurred from nuclear war or terrorism: This may not be your first thought, but many renters insurance policies exclude damages from nuclear war or terrorism on their plan. If you’re worried your home or apartment may be subject to destruction from war or terrorism, you might consider purchasing extra coverage.
How Much Does Renters Insurance Cost?
According to the Insurance Information Institute, the average cost of renters insurance premiums in 2016 came in at about $185 a year. Broken down monthly, the average renters insurance policy costs about $15.50 per month. When searching for renters insurance, it’s also important to know how your credit score comes into play.
The Insurance Information Institute explains how your credit score may impact your insurance score to determine if you have a history of making claims. A history of filing more claims may lead them to charge you more money. At Turbo, you can take advantage of our financial health tool and obtain a free credit report to determine where you stand so you can purchase a renters insurance policy that fits in your budget.
Key Takeaways on Renters Insurance
If you’re asking yourself, “What does renters insurance cover?” hopefully you can use this guide as a resource. Renters insurance coverage is a great way to protect some of your personal items and belongings, as well as the belongings and health of others visiting your property, so consider if this kind of policy is right for you.
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