The age-old rule of thumb is that you can afford two to three times your annual gross income. That means, if you earn $100,000 a year, you can buy a home between $200k and $300k. If you make more, you should aim for a house that costs two to three times your income. But there is a catch: You can’t afford a $500,000 house. So what can you afford?
Income
The best way to determine how much mortgage you can afford based on your income is to estimate how much money you earn monthly. This figure should be at least 28% of your monthly income. So, if your monthly income is $1,218 per month, your mortgage payment would be $4,350 a month. Then, divide that number by 12 to get your maximum monthly outlay. This outlay is your mortgage payment plus other expenses such as property taxes, homeowners insurance, flood insurance, homeowners association fees, and special tax assessments.
While annual income is an important factor in determining affordability, it only provides a partial picture of your financial health. You must also include all of your monthly debts, including student loans, car payments, and credit card balances. The total amount of your debts divided by your gross monthly income equals your debt-to-income ratio (DTI). A DTI of 33 percent or lower is considered to be within the affordable range. Most lenders prefer a DTI under 36 percent.
Cash reserves
Cash reserves are assets you have that you don’t need for down payment and closing costs. Lenders want to ensure that you can afford to make mortgage payments. Cash reserves vary for different lenders, but most will require that you have two to three months’ worth of income in liquid assets. They want to know that you have enough money to cover your monthly housing payments, so they require a substantial amount of reserves.
Your cash reserve requirement depends on your credit score, the type of loan, and your debt-to-income ratio. The automated underwriting system will determine your cash reserve amount based on your financial information. Higher DTI ratios, lower down payments, and low credit score all require more reserves. For these reasons, you should consider your cash reserves before you apply for a mortgage. Hopefully, these guidelines have given you a better idea of how much mortgage you can afford.
Debt
To find out how much mortgage can you afford, first calculate your monthly debt payment. That’s the amount of money you’re currently spending on rent, car payments, and student loan payments. Then divide this total by three. The total monthly debt payment should not exceed three times your gross income, pre-tax. Ideally, you can afford to buy a home that provides financial stability. However, some people can’t afford a home that costs more than their monthly debt payment.
Before making any decisions, it’s important to determine how much mortgage you can comfortably afford. After all, the cost of a home is usually the single largest personal expense, so running the numbers is important. You also need to consider the cost of a house, future mortgage payments, and lifestyle. After making all of these considerations, get loan estimates from several lenders. Make sure you find out exactly how much you can afford – you may be able to purchase a home that costs much less than your monthly debt payment.
Credit score
Your credit score is a big part of how much mortgage you can afford. It represents your overall creditworthiness and ranges from 300 to 850. The higher your score, the better. The lower your debt-to-income ratio is, the less risk you are to the lender. In addition, lenders will be more confident in your ability to make mortgage payments if your score is high enough. But how does your credit score affect the amount of mortgage you can qualify for?
You can improve your score by making sure to pay off all your debt on time. Your credit utilization ratio is the percentage of your available credit that is used up by your debt. A credit utilization ratio of 50 percent means you have ten thousand dollars in debt. Lenders like to see this number as low as 30 percent. Another key factor to consider is your payment history, which makes up 35 percent of your credit score. Late payments stay on your report for seven years, but their impact diminishes as time goes by. To avoid building up too many late payments, close unused accounts.
Down payment
Purchasing a home is one of the most important purchases of your life. But saving for the down payment on your mortgage can be difficult. With rising home prices, it’s hard to come up with the money to cover your entire mortgage payment. Saving for the down payment is often a major milestone in one’s life, but it also raises many questions. Traditionally accepted down payment guidelines may not apply to you. Learn what your down payment amount should be before you begin the process.
When you’re ready to buy a home, you’ll need to find a lender who will lend you the money. A lender will usually require you to put up some money out of your own pocket before he can approve your loan. This amount is referred to as a down payment. It’s a common question among prospective homeowners. To help you determine how much you can borrow, consider the different down payment requirements and choose a lender who offers the lowest interest rate.
