How Much Mortgage Can I Afford?
Buying a home is an exciting experience, but far from easy! One of the trickiest questions to address early on is how much mortgage can I afford. Without knowing your numbers, you run the risk of spending too much money in the future and having trouble paying your mortgage payments.
With that in mind, let’s take a look at how to find out what to take over.
Understand Your Debt-Income Ratio (DTI)
When applying for a mortgage, lenders are interested in several things. Your creditworthiness is an important factor, but most importantly, they want to look at your debt-to-income ratio (DTI). This is an important number to understand as it is the basis on which lenders calculate the amount they want to loan you.
DTI is calculated by Take your gross income (before taxes) and subtract your current and future debts. Current debt includes everything from credit cards and auto loans to student loans and personal loans. Future debt will take into account mortgage payments as well as home insurance, mortgage insurance (if applicable) and property taxes.
Know your magic numbers: 28 and 36
By and large, most lenders will Avoid anything over 43% income debt, since this does not allow a comfortable error rate. In the event of unexpected expenses, borrowers at this level are more likely to miss out on payments. Some lenders accept 43% but usually charge very high interest rates.
Ideally yours is Housing costs should not be more than 28% Of your gross income. The total debt should now amount to a maximum of 36%. Lenders are more comfortable with numbers like this as there is a greater margin of error in case something goes wrong. The greater the margin of error, the better interest rates you are likely to be offered and the more mortgages you can afford.
Calculating your own DTI is pretty straightforward and gives a good idea of how likely it is that lenders will approve your loan. To calculate 28% DTI, simply multiply your income by 0.28. The resulting figure shows the The maximum you should spend on mortgage payments, home insurance, and property taxes every month.
- e.g. $ 5,500 (gross income) x 0.28 = $ 1,540 for mortgage, etc.
If you multiply your income by 0.36, you will know how much can you spend in total to achieve a DTI of 36%.
- e.g. $ 5,500 × 0.36 = $ 1,980 for total debt
If you subtract the 28% from the 36%, you see how much you can spend on debt other than mortgage payments every month. Ideally, this number should roughly match what you already spend on debts like car payments, credit cards, and student loans, etc.
- e.g. USD 1,980 (36% DTI) – USD 1,540 (28% DTI) = USD 440
Don’t forget the upfront cost
It is important to remember the upfront cost of buying a home, as well as the monthly mortgage payments. Consider the following:
- Deposit: With a conventional loan, you must specify at least 3%. However, down payments over 20% are not subject to mortgage insurance. This can significantly reduce monthly payments and allow you to get more equity faster.
- Closing costs: You can typically expect to spend between 3% and 6% of the purchase price on closing costs, which sometimes add up to more than $ 10,000.
- Moving costs
- Maintenance and renovation
While this short list covers the basics, you can pay more or less fees when buying your home. The most important thing is the deposit. By investing a larger amount, you can lower your monthly fees and take out a larger mortgage. In many cases, it may be worth waiting for you saved more for your deposit.
Buying under budget
Preferably Avoid stretching your financial limits. If you can find a home that you need to spend less than 26% of your income on, this isn’t a bad idea. This gives you more cash reserves for renovations and maintenance, but you can also bid in the event of a bidding war. It provides you with a greater financial cushion even at unexpected costs.
Having savings aside is always good, and at any point in time it pays to keep payments in reserve for at least three months.
So before you decide to buy a home, do these calculations to find out how much mortgage you can afford. Knowing your numbers will reduce stress and prevent heartache as you progress!
This article is for informational purposes only and should not be construed as legal, financial, or investment advice or solicitation of any kind. Always consult a licensed attorney, financial advisor, insurance agent, and real estate agent before purchasing any property or insurance.