The amount of debt that a lender feels is comfortable with a borrower is key when it comes to determining the amount of mortgage that particular borrower can afford. This will determine the kind of house you can afford.
Buying a house is one of the biggest investments you can ever make. Some people might get entangled in the excitement that comes with the investment. It is, therefore, important to evaluate how much mortgage you can afford before starting the buying process.
You should make sure that you are shopping for houses that match your financial muscle. This can help you to avoid liking a house that is above what you can afford. That notwithstanding, here are a few ways to figure out the mortgage you can afford;
Check the Interest Rates
The interest rate for your mortgage is set by your mortgage company and can be either adjustable or fixed. Fixed interest rates do not change throughout the loan term while adjustable interest rates change from time to time.
The interest rate you get is determined by factors such as your down payment and credit score, among others. When evaluating how much mortgage you can afford, you need to be careful about the interest rate and choose wisely between the fixed and adjustable options.
A small change in interest rate is very significant when it comes to the amount of money you have to pay every month. In addition, it can also affect the total amount of money you will pay throughout the loan term.
Using a Mortgage Calculator
You can use a mortgage calculator to quickly estimate your monthly mortgage payments. This is crucial in helping you evaluate the amount of mortgage you can afford as well as the closing costs and down payments that you need for your mortgage.
When looking at getting a mortgage and being careful not to exceed your budget, these calculators allow you to provide details such as the amount of money you have for closing costs and down payments, monthly debts, yearly income, and location. And despite rising home prices, qualifying for a mortgage with a $60k income is still possible.
The calculators then take this information and calculate the amount of loan that you can afford. In case you have a certain price for the home you can afford, you can provide this to the calculator, and then it provides you with information such as closing and down payments as well as monthly payments.
Check the Mortgage Term
Mortgage term can be defined as the amount of time, calculated in years, that you have to pay back your mortgage. 15, 20, and 30 years are the most popular loan terms among lenders. You can also get other terms depending on your requirements.
It is important to note that the term of your mortgage has an impact on the payments you make every month. The shorter the mortgage term, the higher the amount of money you will be paying every month.
When you start house hunting, keep in mind that your mortgage payment might be the biggest payment you will be making every month. It is, therefore, important for you to make sure that you will be comfortable making this payment.
Required Reserves
Reserves can be defined as the monthly payments you can make from your savings in a situation where you lost your primary source of income. Different mortgages come with different requirements, but you should make sure that you can make payments for at least two months.
You should, therefore, manage your finances better and figure out how much money needs to go toward your savings account. Always make sure that you have money to cover your mortgage payment lest you end up losing your home.
Check Your Debt-to-Income (DTI) Ratio
When checking your application, the first thing that lenders do is calculate your debt-to-income ratio. This can be defined as the payments you make every month compared to your monthly income.
This number is crucial in helping lenders evaluate the amount of additional debt that you can take. It follows a rule commonly known as the 29/41 rule which indicates that your DTI should be kept within the range that it defines.
29 is used to calculate your housing expenses by dividing your monthly mortgage payment by your monthly income and then converting it into a percentage. 41, on the other hand, is used to evaluate your DTI after taking into account all other debts.
Determining the amount of mortgage you can afford is very important. Fortunately, you do not have to rely on mortgage companies for this. You can do it on your own before you even approach a mortgage company.