How Much Mortgage Can I Afford

1. How Much Mortgage Can I Afford? Buying a house is a big purchase. Therefore, finding out how much mortgage you can afford is the first step towards buying your dream home. However, to avoid ending up with a mortgage you can barely keep up with, you need to be realistic about how much you earn, your expenses and leave room for miscellaneous or unforeseen expenses. Using the 28/36% Rule to Determine How Much Mortgage You Can Afford The best way to determine how much mortgage you can take on is to apply the 28/36% rule. Financial advisors recommend that people spend less than 28% of their income on housing expenses which should not exceed 36% of total debt. The 28/36% rule is a home affordability rule that has been tried and tested. It establishes a solid and accurate baseline for the amount you can set aside to pay your mortgage every month. Let us take a practical example of the rule: Assuming you earn $5000 per month. First, determine 28% of your income. Multiply 5,000 by 28 and divide the result by 100. Depending on your location and income, your income can be enough to cover the mortgage cost or fall short. Understanding Factors That Influence Your Mortgage Luckily, mortgage interest rates are significantly lower than other types of loans. Thus, owning a home is more achievable. Below are some factors that influence mortgages and how they can affect the type of house you can get. 1. Credit score Lenders always offer the lowest mortgage rates to those with high credit scores. Therefore, it is important to work on your credit score and improve it before finding a mortgage. Check your current score through Transunion, Equifax, or Experian. Ask for a report, and carefully examine it for any negative factors or incorrect information. Should you notice any mistakes, consult the reporting agency, and have the proof ready. Then, if everything is accurate, work on improving your score to enjoy low rates when applying for a mortgage. 2.Down payment Most mortgages require 20% of the total price of the home as a down payment. Your lender will offer you better rates when you prove your commitment to making payments. A big down payment means the lender will be risking less by lending you less money.

2. If you feel you haven’t saved up much for a down payment yet, you have an option to refinance later to enjoy a lower rate depending on the market conditions. Unfortunately, it is hard to save a considerably large amount of down payment when buying your first home. Luckily, different first-time homeowners programs assist buyers with little or no down payment. 3. Debt-to-income ratio It is a ratio that compares your income per month to debt obligations per month. When you have a higher debt than income, your ratio will be high and vice versa. The ratio helps lenders to determine how much more debt you can take. Therefore, a higher ratio makes it hard to get a mortgage, and if you do, it will be at a high interest rate. Lenders barely approve mortgages for borrowers with a ratio above 43%. So, before applying for a mortgage, consider paying off as many pending debts as you can to get your mortgage approved. It will also create room for monthly mortgage repayments. Personal Considerations before Applying for Mortgage You understand some factors that the lender will be considering before approving your mortgage. However, you should also perform a self-analysis. Sometimes, a lender can deem you fit to afford a considerable estate. The question remains, can you afford it? Remember, the primary focus of the lender is to check your income and other debts you are servicing at the time. Therefore, perform a realistic self-analysis depending on your net income. You shouldn’t use more than a quarter of your net income to pay off your mortgage. You should consider; Income- how stable is your current job? How many jobs are you working? How quickly can you transition to another job if you lose your current position? Adding debt while you can barely meet your current budget demands is not a smart idea. Lifestyle- what is your current lifestyle and are you willing to make changes to accommodate paying your mortgage? If you are unwilling to forego random luxurious shopping trips or don’t appreciate your budget getting tighter, take a more conservative approach when finding your dream home. Expenses- how comfortably are you managing your current expenses? Do you have kids who will soon get into college? Consider your current and future expenses and determine if there is space left to pay off the mortgage. Considerations after Mortgage Although paying off a mortgage is the most hectic part of getting a home, some additional expenses come with getting a new home. Even after the mortgage is paid off, you need to pay property taxes, home insurance, utilities, and maintenance costs.

3. Take Away Buying a home is a large personal expense. Therefore, before applying for a mortgage, it is essential to take a step back and determine how much mortgage you can take on. Take note of what the lenders need to ensure you enjoy low mortgage rates. Even if you qualify for that luxurious dream home, do a thorough and personal evaluation on whether you can meet the costs.