How Much Mortgage Can I Afford?

How much mortgage can I afford to get my desired mortgage? Are you thinking of getting a mortgage loan to make a purchase of a home, land, property, or other types of real estate?

How Much Mortgage Can I Afford?

However, to get a mortgage means you are ready to provide the lender with all the necessary requirements that are needful.

Also, how much mortgage you can afford largely depends on different factors. And does not really depend on what your lender is ready to lend to you. Let’s see more of these factors that will be determinants of how much mortgage you can afford.

What Is a Mortgage Loan?

Before you begin to plan on how much mortgage you can afford there are basic factors you should consider. You will need to consider your source of finance including your earnings, your priorities, what you want to do with the loan, and more. Let’s see what mortgage loans are all about first before you begin with factors to consider on how much mortgage you can afford.

According to investopedia.com “A mortgage is a type of loan used to make a purchase or to maintain a home, land and other types of real estate” https://www.investopedia.com/terms/m/mortgage.asp  mortgage loans are used to buy homes and any other kind of real estate. The property serves as collateral, and there are different kinds of mortgages including adjustable-rate and fixed-rate.

Mortgage rates vary based on the type of product and qualifications of the applicant. Mortgage cost also depends on the type of loan and how long it can stay and the interest rate of the lender.

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How Much Mortgage Can I Afford based on Income

Since mortgage can be used for home, land, and other real estate investment, it’s you that determine how much mortgage you can afford. However, you can afford a mortgage that is between two and a half of your gross income.

For example, if you are earning $200,000 per year and can only afford a mortgage of $300,000 to $350,000. However, this calculation is only a general guideline.”

Furthermore, when planning on a property, you should consider different additional factors. First, it’s good to let the lender know how much you can afford.

Secondly, you need to think about the kind of home that you want to live in and how long you intend to stay, and the other priorities you will have to lay aside for the time duration.

How Do Lenders Determine Mortgage Loan Amounts?

Each mortgage lender has its own set-out criteria for affordability. But your ability to a mortgage and all the terms of the loan you will be offered will always depend mainly on the following factors.

The factors of assets, Income, liabilities, and debts. Before a lender approves your mortgage loan, they will want to know how much income an applicant earns. The demands on your income and the future potential of the income in the future and many other factors that may affect the applicant’s ability to pay back.

However, other factors like income, down payment, and monthly expenses are generally basic qualifiers for financing. And others like credit history and score determine the interest rate on the mortgage financing.

Factors To Consider When Getting a Mortgage Loan

Let’s share some basic factors to consider when getting a mortgage loan. There are as follows;

Gross Income

Gross income is the total income a prospective applicant makes before taking out taxes and other obligations. This is generally involved your basic salary plus any bonus income and includes part-time earnings, self-employment earnings, Social Security benefits, disability, alimony, child support, and more.

Front-End Ratio

This is a mortgage-to-income ratio. It is a ratio of the percentage of your annual gross income that can be kept for paying your mortgage each month. The total amount of money that makes up your monthly mortgage payment is made up of four components.

The principal, interest, taxes, and insurance both property insurance and private mortgage insurance if required by your mortgage.

The basic fact remains that the front-end ratio based on PITI should not exceed 28% of your gross income. However, many lenders let borrowers exceed 30%, and some even let borrowers exceed 40%.

Back-End Ratio

This is another factor to consider, the Back-End Ratio is also called the debt-to-income ratio (DTI), it calculates the percentage of your gross income required to cover your debts. Debts include credit card payments, child support, and other outstanding loans including auto, student, etc.

For example, if you pay $2,000 each month in debt services and you make $4,000 each month, your ratio is 50% of your monthly income is used to pay the debt.

However, a 50% debt-to-income ratio isn’t going to get you that dream home. Most lenders recommend that your DTI not exceed 43% of your gross income. To calculate your maximum monthly debt based on this ratio, multiply your gross income by 0.43 and divide by 12.

Your Credit Score

If you want to buy a home soon, pay attention to your credit reports. Be sure to keep a close eye on your reports. If there are inaccurate entries, it will take time to get them removed. And you don’t want to miss out on that dream home because of something that is not your fault.

Your credit score goes a long way to affect how much mortgage you can afford from a lender. However, Mortgage lenders have created a formula to determine the level of risk of a prospective client.

The formula varies but is generally determined by using the applicant’s credit score. Applicants with a low credit score can expect to pay a higher interest rate on their loan.

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The 28%/36% Rule

The next one is the 28%/36%. It is a heuristic method used to calculate the amount of housing debt one should assume.

According to this rule, a maximum of 28% of one’s gross monthly income should be spent on housing expenses. Also, not more than 36% on total debt service (including housing and other debt such as car loans and credit cards).

Lenders often use this rule to assess whether to extend credit to borrowers. Sometimes the rule is amended to use slightly different amounts, such as 29%/41%.

How to Calculate a Down Payment Amount

The down payment is the amount that the buyer can afford to pay out-of-pocket for the residence, using cash or liquid assets.

Lenders usually demand a down payment of at least 20% of a home’s purchase price. But many let buyers purchase a home with significantly smaller percentages. Obviously, the more you can put down, the less financing to pay back.

However, outside the amount of financing, lenders also want to know the number of years for which the mortgage loan is needed. A short-term mortgage has higher monthly payments but is likely less expensive over the duration of the loan. Homebuyers need to come up with a 20% down payment to avoid paying private mortgage insurance.

Personal Considerations for Homebuyers

A lender could tell you that you can afford a considerable estate, but can you? Remember, the lender’s criteria look primarily at your gross pay and other debts. The problem with using gross income is simple. You are factoring in as much as 30% of your paycheck but what about taxes, FICA deductions, and health insurance premiums?

In addition, consider your pre-tax retirement contributions and college savings, if you have children. Even if you get a refund on your tax return, that doesn’t help you while still, the mortgage is still running how much will you get back?

That’s why some financial experts feel it’s more realistic to think in terms of your net income and take-home pay. And that you shouldn’t use any more than 25% of your net income on your mortgage payment. If you do this you may end up with nothing left for your home

Also, consider the costs of paying for and maintaining your home which can take up a large percentage of your income. This will be far and above the nominal front-end ratio.

This may leave you with insufficient funds to cover other discretionary expenses or outstanding debts even to save for retirement or even a rainy day. All these factors notwithstanding getting approved for a mortgage doesn’t mean you can afford the payments.

Pre-Mortgage Considerations

In addition to the lender’s criteria, consider the following issues when contemplating your ability to pay a mortgage:

Income

Are you relying on two incomes to pay the bills? Is your job stable? Can you easily find another position that pays the same, or better, wages if you lose your current job? If meeting your monthly budget depends on every dime you earn, even a small reduction can be a disaster.

Expenses

The calculation of your back-end ratio will include most of your current debt expenses. But you should consider future costs like college for your kids (if you have them) or your hobbies when you retire.

Lifestyle

Are you willing to change your lifestyle to get the house you want? If fewer trips to the mall and a little tightening of the budget don’t bother you. Applying a higher back-end ratio might work out fine. If you can’t make any adjustments or already have multiple credit card account balances. You might want to play it safe and take a more conservative approach in your house hunting.

Costs Beyond the Mortgage

While the mortgage is undoubtedly the most considerable financial responsibility of homeownership. There are many additional expenses, some of which don’t go away even after the mortgage is paid off. Smart shoppers would do well to keep the following items in mind:

Property Taxes

If you own a home, expect to pay property taxes, and understanding how much you will owe is an important part of a homebuyer’s budget. The city, township, or county establishes your property tax based on your home. And lot size and other criteria, including local real estate conditions and the market. You will always have to account for paying property tax, even when your mortgage is paid off in full.

Home Insurance

Every homeowner needs home insurance to protect their property and possessions against natural and human-made disasters, like tornados or theft. If you are purchasing a home, you will need to price out the appropriate insurance for your situation.

Most mortgage companies won’t let you purchase a home without home insurance that covers the purchase price of their home. In fact, you may need to show proof of home insurance to be approved by your mortgage lender.

But the amount goes up depending on the type of insurance you need and the state you reside in.

Maintenance

Even if you build a new home, it won’t stay new forever, nor will those expensive significant appliances, such as stoves, dishwashers, and refrigerators. The same applies to the home’s roof, furnace, driveway, carpet, and even the paint on the walls. If you are house poor when you take on that first mortgage payment. You could find yourself in a difficult situation if your finances haven’t improved by the time your home requires significant repairs.

Utilities

Heat, insurance, electricity, water, sewage, trash removal, cable television, and telephone services cost money. These expenses are not included in the front-end ratio, nor are they calculated in the back-end ratio. Nevertheless, they are unavoidable for most homeowners.

In addition, consider that a bigger house means higher utility bills due to heating and cooling energy needed to condition the bigger space. Many people overlook that when they see a big charming home.

Furniture and Décor

Before you buy a new house, take a good look at the number of rooms that will need to be furnished and the number of windows that will require covering.

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FAQ

How Much of a Mortgage Can I Afford Based on My Salary?

The amount of a mortgage you can afford based on your salary often comes down to a rule of thumb. For example, some experts say you should spend no more than 2x to 2.5x your gross annual income on a mortgage. (So if you earn $60,000 per year, the mortgage size should be at most $150,000). Other rules suggest you shouldn’t spend more than 28-29% of your gross income per month on housing.

What Does It Mean to Be House Poor?

House poor is a situation where most of your wealth is tied up in your house and much of your income goes toward servicing the mortgage debt and related expenses.

An example would be if you had $100,000 in savings and used all of it to finance a $500,000 property with a $2,500 monthly mortgage payment when your net income is $3,000 per month.

Such a situation can give the illusion of economic prosperity but quickly unravel to foreclosure if things turn sour.

How Much Debt Can I Already Have and Still Get a Mortgage?

The amount of debt you can have will depend on your income, and in particular your debt-to-income (DTI) ratio. Generally having a DTI of 30% or less is the rule of thumb going into the mortgage application process, and with the mortgage, it shouldn’t then exceed 43% on the back end.

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