Purchasing a house can be a complicated decision when you are unsure of how much mortgage you can afford. In this situation, it’s important to know your financial capabilities so you are sure of paying up the premium without economic restrictions. Moreover, you will have to qualify for a home loan from your bank.
This guide will explain everything to calculate how much mortgage you can afford accurately.
Factors To Determine Your Mortgage Affordability
In general, homeowners can afford financing properties costing at least twice their gross income. However, the final amount is decided by the bank offering the loan agreement based on additional factors, such as the type of home the buyer wants, the estimate offered by the lending bank, and more.
Even though every lending bank that offers you a mortgage has its own eligibility criteria, some factors are still dependent on your hands to get an idea of the amount you can get for buying a home or other property.
Gross Income
Your total income will be the primary factor for deciding your ability to pay a periodic premium. Gross income is the amount before deducting the taxes. It can also comprise additional earnings besides a base salary, such as child support, alimony, disability, Social Security perks, self-employment earnings, part-time earning, and other bonus incomes.
Front-End Ratio
The front-end ratio decides the percentage out of your annual gross income that you can use for paying a monthly mortgage. This mortgage amount that you pay monthly includes four key components, which are principal, taxes, interest, and insurance. If you use a mortgage calculator, you will get details of these values and several others so you can estimate a valid mortgage amount. Usually, the front-end ratio should stay below 28% of your gross income. However, you may find some lenders exceeding that ratio to even 40%.
Back-End Ratio
Back-end ratio gives you an estimate of the percentage amount that you require to cover debts, such as outstanding loans, credit card payments, student fees, child support, and other deductions. It’s recommended that this ratio should stay under 43% of the gross income you earn.
Credit Score
Mortgage lenders often estimate your ability to afford a loan amount based on your credit score. A low credit score will obligate you to pay a higher interest. If you plan on buying in the future, make sure your credit score is as high as possible. You can do that by paying your outstanding bills on time, clearing old loans, and more.
How To Get An Estimate Of A Down Payment
Down payment is the initial amount that a buyer pays upfront using liquid assets or cash. This amount is usually 20% or higher of the total price of a property, but you may also get an offer to lay a lesser down payment. However, you have an advantage to finance a less mortgage if you can pay a higher down payment.
Lenders will decide how much mortgage to lend a home-buyer based on several factors. The most prominent among those factors are the buyer’s liabilities, assets, debt, and income. A lender will always make sure to have a clear idea of the amount you can afford to pay back on time. Based on these qualifying factors, including credit history, the lender offers you a mortgage deal.
Additional Expenses To Consider
Besides the mortgage, you will also need to consider additional costs that will stay with you even after you pay off your mortgage completely. A concerned buyer should know the following expenses as well:
· Property taxes – If you own a home, you have to pay a property tax, which your county, township, or city establishes on you based on the size of your home, and other real estate requirements in your locality. Usually, this value is about 1.1% of the total assessed value of your house.
· House Insurance – You are liable to protect your possessions and property, for which you need to get insured against artificial and natural disasters. Most mortgage lending companies will not approve your mortgage unless you show proof of home insurance.
· Maintenance Costs – These expenses are a part of a home-owners financial budget, which ensures that your property stays habitable.
Buying a house is one of the costliest investments, and every person desires to have one. Before buying a house, carefully plan your budget and calculate your financial risks properly so you can afford a mortgage. You may even need to make changes in your lifestyle so you can easily pay your mortgage on time. Smart planning will let you enjoy owning a house without burdening yourself.
