How Much Can You Afford For A Mortgage?
Can You afford a mortgage? Is the first question you ask when you decide to buy a house. Then the next question to ask yourself is, How much can you afford for a mortgage? A home loan will most likely be the biggest debt you will have, and the debt that have priority over any other debt. So, here we will help you to figure out how much you can really afford and how banks and lenders evaluate your situation and determine how much they will lend you to buy a home. Lenders determine how much you get mortgage based on factors like, credit score, credit history, DTI ratio(Debt to income ratio), income, etc. Let’s get started to get you on the right track for your home buying process.
Your Income Or Household Income: that is a straight forward step; add all household income, you and your co buyer (Spouse, partner, etc.). Now you can figure out how much your monthly expense is, include any rent, credit card payments, student loan, auto loan, etc. Try to be as accurate as possible to find out how much you really can afford for the mortgage. Make sure you have enough room for emergency repair, or when life happens. If you are like some people who likes to go out enjoy few meals out few times a month, make sure to keep that in mind. The point here is to get a mortgage for a house you want without putting unnecessary stress, or dramatically changing your lifestyle. After all, buying a house and getting a mortgage is a big purchase, and long commitment.
How Much Percentage Of Your Income Should Go To The Mortgage? Most of financial planners and financial advisors, do recommend that a 28%-36% of your income goes toward mortgage, and monthly expense including all other debt.
Here are examples:
- Monthly income: $5000.00 28% = $1400.00
- Monthly income: $5000.00 36% = $1800.00
That is of course a starting point. Depend on what you do, where you live could be more than enough to cover the mortgage payment. The affordability calculator is a starting point to give you an idea of what you would be comfortable with. That being said, it is always good idea to know how much you can afford for a mortgage so you can plan ahead.
Interest Rate: everyone likes to get the lowest interest rate, low monthly payment, and short term home loan, but we all know that is not available for everyone. Getting low interest rate on your mortgage means huge savings in the life of the loan, so here are what lenders look for during the loan process.
Credit Score: no secret that higher your credit score is, lower interest you get, adding to that a sizable down payment will also help with the interest rate as well as the monthly mortgage payment. If you are thinking of buying a house and going through the home buying process, is always good idea to know what your credit score is. You can get free copy here annualcreditreport.com. After you read the report, if there is any discrepancies, or what you think is an error on you report make sure to alert the lenders and the credit reporting agencies.
DTI or debt to income ratio: is how much you make and how much your debt is in comparison. This is important because is one of the deciding factors for lenders to determine how much they can lend you. Higher income, with lower debt, more money you can borrow, and vice versa. Some people might have high credit score, but high DTI ratio, and still might not get a loan, or get a loan with high interest rate. To be consider, try to pay off some balances on your credit cards(if applicable).Even if it is $600.00. That small amount could free a $25.00/month thus could increase your mortgage amount by $10000.00. Moreover, make sure that you only using 30% or less of your credit cards limit, REGARDLESS the limit is. It goes without saying, that would be an ideal situation if you can pay off all your debt to make room for your mortgage payment, and mortgage amount you would get approved for.
Personal experience: while back I had a few unfortunate situations where I had some collections on my credit report. I paid them of and was on the road on rebuilding my credit. After they fall of my report, I got a secure credit card with $300.00 limit. I maxed that card every first day of the month, and paid it off in the end of the month. I thought I was doing well by establishing credit history. I didn’t know better. I had an auto loan with about 14% interest rate. I didn’t realize what I was doing wrong until I spoke with someone from Experian (Credit consultation), and she explained to me how the DTI ratio really works. After that I only kept about 10% of the limit, and refinanced my car for 3.9%.
Here is an example for your debt to income ratio:
If you make $5000.00 a month and your expenses as follow
- Rent: 1300.00
- Car payment: 300.00
- Student loan: $150.00
- Credit card and loan payments: $120.00
- Total: $1870.00
- Your DTI is: $1870.00 ÷ $5000.00 = 37.75%
So, if you free the credit card and loan payments; that will free more monthly payments for your mortgage and will increase the amount you could borrow. However, don’t stress yourself out if you can’t pay it before getting the house. You can always refinance later with better terms and lower interest rate.
Down Payment: is an ideal if you have some money saved. Lenders like the borrower to pay sizable down payments for 2 main reasons
- The borrower has invested in the home, so less likely to walk away from the investment. It shows commitment. (Skin in the game).
- The lender will lend less, therefore less risky for lender and low LTV or (Loan to value ratio).
That being said: we all know it is not very easy or always going to have large amount of money saved up. Don’t worry, there are different programs especially if you are first time home buyer.
Online Or Local Lenders? Applying on mortgage online is easy and convenience, however, most of the companies online will be located in different states, and might not be easy to have all the necessary questions answered and get the state and local help you may qualify for.
Local lenders: are well aware of the rules and regulations, and local and state programs that may help you especially if you are a first time home buyer. We do recommend a local lender. You can find a local lender here.
Best Of Luck!