If you are planning to buy a home, you have to consider a number of factors, the most important one being the cost. Making the decision to acquire property will depend on how much you can afford. Most prospective homeowners can usually afford a mortgage that costs between 2 to 2.5 times their gross income. Knowing how much you can afford will help you to make the right choices when looking at property and you can avoid buying a home that will be too costly.
When considering the issue of affordability, you have to know that the lender will have an opinion about what you can afford to borrow and this will determine the mortgage amount that the lender is willing to give. Lenders use different formulas to determine the size of mortgage that the borrower can handle. As a borrower, it is important to evaluate your finances and determine your preferences when making the important decision. Knowing the mortgage size that you can afford will help you to save time as you avoid viewing homes that are not within your price range.
Several debt-to-income ratios that different lenders use to determine the amount of money an individual can borrow exist. The lenders determine how much they lend mortgage borrowers and knowing the factors they use will help you. The Front-end Ratio is the percentage of annual gross income that goes into paying the mortgage each month. The four components of the mortgage payment are principal, interest, insurance and taxes. As a rule, the items do not generally exceed 28% of gross income. However, in some cases, lenders allow borrowers to exceed 30%, while some allow up to 40%.
The debt-to-income ratio or "Back-End Ratio" determines the percentage of income that is required to pay the debts. In this situation, the mortgage is included alongside debts such as car payments, credit cards, child support and other loans. The debt-to-income ratio should be 36% or less of the gross income. In locations where homes come with a high price tag, it is usually difficult to keep within the 36% mark. There are lenders that permit a debt-to-income ratio that is as high as 45%. The higher the ratio, the more the interest rate is likely to be. In this case, choosing a less expensive home is better.
In most cases, lenders require a 20% down payment and this is determined by the price of the home. This reduces the property mortgage insurance requirements, but there are lenders that allow buyers to buy their home with lower down payments. With a down payment of at least 20% or more, the borrower may not require mortgage insurance. It is important to realize that the down payment affects the monthly mortgage payment. Larger down payments can be used for purchasing more costly homes.
Consider personal criteria
When deciding the mortgage amount that you can afford, you need to consider your personal criteria. As the borrower, you should not just consider what the bank or lender determines but what mortgage you can really afford. Just because you are approved for a certain amount does not mean that you can afford the payments. When making your personal evaluation, consider factors that go beyond your current salary. You need to ask yourself questions such as whether you have a stable job, if you need two incomes to cover your bills, and how you would deal with losing your current job.
Consider your lifestyle
When determining the mortgage you can afford, you have to determine if you would be willing to make some lifestyle changes if need be. It may be necessary to make some changes in order to afford the new home. Determine how tightening your budget will impact your current lifestyle and consider whether a high back-end ratio may be the best option for you. If you cannot change your lifestyle or tighten your budget further, choose the more conservative option. The back-end ratio considers the current debts, but you need to know that there may be debts in the future that are not reflected.
Consider your personality
Most people will agree that the borrower’s personality plays a major role when it comes to determining the best mortgage. There are people who are better at making specific payments each month than others. Talk to a mortgage expert to try to come up with a payment plan that works for you. Determine all the options available and remember to shop around for the best mortgage rates. A seemingly small difference in interest rates can mean thousands of dollars in savings over the loan’s lifetime.
When figuring out how much mortgage you can afford, think about the money you will spend over and above the mortgage. There are some expenses that you need to consider and they include the maintenance of the home, utility expenses and other financial obligations.