How Much Mortgage Can I Afford?
Applying for a mortgage loan to buy a
house is an extensive personal investment. Like other mortgage applicants, you
are wondering, 'how much mortgage can I afford.'
Numerous factors determine how much
mortgage you can afford. Below is everything that lenders consider to determine
how much mortgage you can afford.
How Much Mortgage Can I Afford?
Most homeowners can afford a mortgage 2
or 2.5 times their annual gross income. Therefore, under this general formula,
if you earn $200 000 a year, you can afford a mortgage of between $400,000 and
$500,000. However, this is a mere general guideline.
When conclusively determining how much
mortgage you can get, your lender will put in additional factors. First, the
lender will evaluate your financial situation and how much they think you can
afford.
Second, as a borrower, you need to
research and determine which home you would like to live in and which
consumption expenses you're willing to forego.
What Information do Lenders Use to
Determine My Mortgage Loan Amount?
Although each lender will use their
unique criteria to determine your loan affordability, there are some general
factors every lender will consider. These factors include;
Gross Income
How much do you earn before paying taxes
and other financial obligations? Your gross salary and bonus income make your
gross income. Other sources of income like part-time earnings and earnings from
self-employment are factored in as well.
Back-End Ratio
Often known as DTI- Debt-to-Income
ratio, the back-end ratio is a percentage of your total gross income to your
debts. For example, your credit card payments, outstanding loans, and child
support are categorized as debts.
For example, if you earn $5,000 monthly and $2500 is deducted under debt services, you use half your income to pay the debt. Unfortunately, lenders consider a 50% back-end ratio alarming and will reduce the amount of mortgage you can borrow. Therefore, mortgage lenders recommend working on your DTI and maintaining it below 43%.
Front-End Ratio
It is a ratio that determines how much
of your yearly gross income you can dedicate to paying your mortgage. Your
mortgage repayments consist of the loan principal, interest, tax, and
insurance. Therefore, gross income will significantly help determine your
front-end ratio.
To afford a high mortgage, ensure that
your front-end ratio based on the mortgage repayments should be less than 28%
of your total gross income. Nonetheless, some lenders can allow as much as a
30% front-end ratio.
Credit Score
To assess your risk as a borrower,
lenders will use your credit score information. Your credit score determines
how much mortgage you can afford and at what rate. Therefore, ask for a copy of
your credit score from a credit bureau and counter-check that all the
information presented is accurate.
How Much Will I Pay as Down Payment
When taking out a mortgage, your lender
will ask you to pay some proportion of the total house cost as a down payment.
Down payment is an out-of-pocket expense that you can afford to pay for the
house either in cash or through liquid assets.
Most lenders will ask for a 20% down
payment of the total purchase price of the home. The higher the down payment,
the less financing help you will need.
For example, if you would like to buy a
home worth $40,000, and you pay a 20% down payment, you will only need to
borrow $32,000. Therefore, the banks will consider you at less risk and offer
you enough mortgage.
Lenders will also consider the mortgage
duration. How long will the mortgage go for? A short-term loan attracts high
monthly payments, but overall, it tends to be cheaper than long-term mortgage
loans.
How do Lenders Decide How Much Mortgage
I Can Afford?
There are numerous factors that lenders
will consider when determining your affordability as a borrower. However, they
narrow down to your income, assets, debt, and liability. Your lender will need
to know how much income you make and the total demand on the income to assess
whether you can handle additional debt.
Your income and down payment also are
used as a base to assess whether you qualify for financing. Credit history is
also assessed to forecast your ability to repay the loan over the mortgage
period.
How Much Mortgage Can I Afford on My Salary
Calculator?
If you want to determine how much
mortgage you can afford using your salary calculator, crunching the numbers is
a good place to start.
- How much do you and your co-buyer or partner earn
every month? When calculating your income, account for all revenue
streams, including alimony, rental earning, and investment profits.
- What does your estimated housing cost? How much
down payment do you think you can afford? Factor in the estimates,
mortgage interest rate, property tax, homeowners insurance, and loan
terms. Most people prefer a loan repayment period of 30 years, although
some also opt for short-term mortgage loans.
- How much do you spend on expenses every month?
Tally up your total expenses or money that goes out every month. Your
expenses are important in determining how much more you can spend on your
monthly repayments.
Input the above information on a
mortgage calculator and get an idea of how much mortgage you can afford.
Follow the 28/36% Rule
To increase the amount of mortgage you
can afford, consider using the 28/36% rule, which most financial advisers
advocate. You should spend less than 28% of your gross income on housing
expenses and less than 36% on total debt. This home affordability rule has been
tried and tested and helps establish a baseline for the total amount you can
afford to pay the monthly mortgage.
Take Away
How much mortgage you can afford depends
on how much you earn, your expenses, and your debt. Other factors like your
credit score and the amount of down payment you can raise can also help
increase the total amount of mortgage you can afford.
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