How much mortgage can I afford?

If you want to buy a home, the first thing you need to know is how much mortgage your income can stand. Find out how much mortgage you can afford in this article.

Are you looking to buy a home?

Finding the right home for you and your family may seem daunting, but before you start your search it’s more important to know how much mortgage you should request.This way you can get the keys to your ideal home by putting a strong offer with a pre-approval letter.

When you are looking to buy a home, whether it is your first one or your next one, you must take into consideration several variables, the most important being how much mortgage you can afford.

The ideal amount of mortgage to request will depend on many factors, and that is why today we want to give you some tips so you can know how to calculate the best mortgage loan for you. Keep reading to learn more.

How to know your ideal mortgage amount?

Buying a new home is exciting, but it should not make you feel insecure and stressed. It should provide you with a sense of stability and financial security. The last thing you want is to fall in love with a house to later find out that you don’t qualify for the loan.

So, your ideal mortgage should be based on the 28/36 rule that states that your mortgage payment (which includes property taxes and homeowner’s insurance) should be represented by no more than 28% of your income.

The 36 in this equation represent your total monthly debt, which should not be more than 36% of your total income. Both of these percentages are calculated pre-tax dollars.

Most lenders work under this rule, although in some cases you can find loans up to 40% and even 43% of your income, but these cases normally have higher interest rates and are harder for you to pay.

But, the best decision in general for your budget is not give your mortgage more than 28% of your general income to be able to breathe and not be constantly worried about your debts.

Staying in the 36% limit will allow you to manage all your debts while maintaining a relatively comfortable lifestyle.

These percentages are comfortable, whether you have 3.5% or 20% down payment, and they are the most used formulas when your mortgage is calculated for a regular home loan.

Regular loans are lenders’ favorites, but there are other types of loans depending on their characteristics:

• FHA loans are for people with small down payments and first-time home buyers.
• VA loan has a $0 down payment for veterans, select military spouses, and service members.
• USDA loans are low interest loans with $0 down, low interest rates, don’t have the best credit, and want to live in select
suburban and/or rural areas.
• Jumbo loans are for people looking for mortgages higher than standard loans.

But if you are like the 76% (4) of people who preferred a regular or conforming loan to buy one of the 701,000 (5) houses sold in 2019, you can be confident that, regardless of your down payment, the 28/36 rule is the best way to ensure yourself a comfortable and manageable mortgage and a stress-free life.

So, your ideal mortgage amount will be one that allows you to fulfill every month’s payments, while also letting you be responsible with all your other obligations and having some money left to live and, if possible, save a little.

How to calculate your mortgage amount?

You know that you do not want to live by the day, living month to month to cover all your obligations such as utilities, groceries, loans & debts, and most importantly, mortgage.

Much less you want to be a part of the statistics, just as the 624,753 mortgage loaners (1) who failed at paying their mortgage and are now in trouble.

So, to calculate the mortgage amount you will need to crunch some numbers:

Your monthly income

This is the pre-tax money that enters your home. It can come from yourself, your partner, and/or your co-signer; as well as any extra pre-tax income you receive.

The amount of money that you declare as income must be received every month, so you know you can always count on that amount of money available with the same periodicity.

Your down payment

The down payment is the previous amount of money that you count on to give the loaner upfront the home’s purchase.

This amount can be as high as the buyer can afford, most lendersprefer a down payment of 20%, but in some cases,it can be as little as 3.5% of the total house price.

Although the average down payment is 12% of the house’s price (2), the higher your down payment is, then the lowers your monthly mortgage payment will be.

Your total expenses

Every month, besides your mortgage, you will also have to pay for other expenses: maybe a student loan, your utilities, rent for your current home, etc.

Make sure you make a list with all your regular expenses, and even an extra 10% of that for unexpected events and keep the total of that number as well.

Front-end ratio maximum payment

This is the highest monthly amount of money that you can spend on your mortgage. To calculate, you have to follow a formula:

annual pre-tax income / 12 x 0.28

Or, what is the same:

monthly pre-tax income x 0.28

So, for example, if your annual pretax income is $48,000, then:

$48,000 / 12 x 0.28 = $1120

Or:

$4,000 x 0.28 = $1120

With this formula in this example, your maximum mortgage payment every month calculated with the front-end ratio is $1,120.

Back end ratio máximum payment

This is the highest monthly amount of money that you can spend on your mortgage, calculated with your debt.

For this value, use the formula:

annual income / 12 x 0.36 – monthly debt

Or what is the same:

monthly income x 0.36 – monthly debt

Following the previous example, if your annual income is $48,000, and your monthly debts are $400, then:

$48,000 / 12 x 0.36 – $400 = $1,040

Or:

$4,000 x 0.36 – $400 = $1,040

This means that your maximum mortgage payment amount under the back end ratio is $1,040.

When you visit a private loan office, the professional assessor will use the lower of both numbers to calculate your mortgage, in this example, that is $1,040, very near to the average mortgage of 1,100 of people who offer an average of 6% for the down payment (6).

This amount of money is used to calculate the maximum price of a home that you can buy.

Every situation is different for every person. We recommend you call our office today so we can get you a more accurate estimate based on your specific situation.

Advice when having a mortgage

When you are in the search for your perfect home, you want to maximize the benefits of your mortgage. Once you know how large your loan can be and you are pre-approved, follow this advice:

The bigger the down payment, the better

This is not an after buying, but it can build up while you find the home you will buy.

Try to always to give the highest amount of money you have for the down payment. This way your monthly payments, taxes and other fees will decrease, making your home more affordable.

Make the effort to have at least 10% of your home’s price for a down payment. If you manage to pay 20% you will not have to pay for the private mortgage insurance (PMI).

But, even if you cannot get closer to the 10%, make sure to save up as much as you can for a down payment.

Make sure to have a savings fund for unexpected circumstances

While you have to pay for your mortgage, you must have a little money on the side to help you if something unexpected happens.

Maybe you have to make an urgent renovation or fix in the new house, or you have to cover some medical bills, or you have to make some car arrangements. You want to know that you will have a fund to cover for these cases without breaking your finances.

The recommended amount of money to keep in a savings fund is 3 months of your regular expenses. But ideally, you should have 6 months’ worth of most of your monthly debt.

Having this money after you buy is a great way to help you ensure that you will not be in danger of default and foreclosure. Also, it is a savings amount that will work to cover upcoming mortgage payments if your financial situation changes.

Use an agent to help you find your home

There is nothing bad with looking online, but working with a professional is better for you and your interests because they are more familiar with current market trends, listings that have not come on the market yet, and have connections that can help you find a better home for your money. We have close relationships with several real estate agents that we would be happy to recommend to you.

In most cases, using a realtor can even be free for you, so it will not reflect on your debts to pay.

What happens after I get approved?

Congratulations! You have been approved and you have achieved your goal of becoming a home owner. However, the journey has just began.

You must remember that once you have received a mortgage loan, you have to make sure to meet your monthly payments because not doing it can have negative consequences.

The worst consequence is, of course, foreclosure (7). This means you unattended various payments and you are considered not able to meet your debt. Therefore, your home is repossessed.

Another negative consequence of not paying your mortgage on time is getting higher interest rates, and extra interest fees due to lack of payment. This makes you end up paying more money than at the beginning, so it will be a vicious circle that will only worsen your situation.

On the other side, your credit score will suffer. Your numbers will be low and every possible loan for a home, or other circumstances, will be harder. You will not be seen as a responsible individual anymore.

This is why we recommend you follow the advice mentioned in this article. This way you can enjoy the purchase of your new home for many years to come.

Conclusion

As you can see the home buying process involves many steps. Finding a mortgage that adapts to your budget and lifestyle will help you to really enjoy your new home because you will not be constantly worried about the payments and responsibilities you have to fulfill.The good news is that Mid Valley Financial can help you get the best loan for your needs. This way you can get into your dream home before you know it.