The reason why some homeowners struggle with their mortgages is because they qualified for more than they can afford. When you borrow more, you’ll have to pay more. So if you are confident in buying a home, take time to go over your financial situation and ability at this point. Your goal is to come up with a realistic answer to the question, “How much mortgage or house can I afford?”
How Much Is Your Mortgage?
These factors can help you determine how much mortgage debt you can comfortably take on.
1. Income and debt. If you were to borrow for a home, would you be able to pay it along with your existing monthly obligations given your current income?
Add your income before taxes from your basic salary, part-time work, investments, bonuses, and commissions. In mortgages, there is the debt-to-income ratio to help determine how much of your gross monthly income goes to your debt payments, including a mortgage.
For example, if you gross $10,000 a month and have monthly debt obligations totaling $3,000, your DTI is 30%. Mortgage lenders in general would like your monthly mortgage payment to not exceed 28% of your total monthly income. This is called the front-end ratio that is dedicated to housing expense.
Then there is the back-end ratio where all your other debt obligations are taken into account. Mortgage lenders usually want a back-end ratio of 36% or lower.
Use the DTI as your guide in finding the right loan size and the right home price.
2. Downpayment. The size of your downpayment will weigh in your mortgage affordability.
While there are mortgage programs like USDA and VA that can offer up to 100% financing, most mortgages require you to cover a percentage of the purchase price.
Downpayments, if they are large, allow you to take out a smaller mortgage loan and thus lower monthly payments.
3. Monthly payment. Other than the loan amount and the interest rate, your loan length will determine how high or low your monthly payment will be.
If you take out a 30-year fixed-rate mortgage, expect your monthly payments (principal and interest) to be really low as the loan gets stretched for 30 years.
But if you borrow with a 15-year fixed-rate loan, the monthly payment will be higher because of the expedited repayment period. This will mean more savings in interest costs.
Your goal in your mortgage endeavor is to identify the mortgage that you can responsibly pay for, something that you can afford in the long run.