Trying to determine how much mortgage you can afford will require assessing your finances. In simple terms, you must know how much you make. This will determine the amount the lender will give to you.
Know Your Gross Monthly Income
This is how much money you make per month. When assessing this, include every possible source of income you have as long as it is regular. To get a loan, these earnings must be reflected in your tax returns. If you have properties that generate money like stocks, be sure to include them too.
When assessing your gross income, having your tax return papers by your side will help. If you are still not sure, talk to a loan officer. This will help you determine how much mortgage you can afford.
Know How Much Debt You Owe
Next, you should make a list of all your debts. This should include credit card debt, car loans and any installment loans. If you have child support or other monthly dues, these need to be calculated too. This is necessary because lenders will want to know how financially stable you are.
This last point is very important. While getting a dream house is almost everyone’s dream, you must face some realities. Get an honest assessment of your debts now, so you won’t have to worry about getting a mortgage you cannot pay.
A Typical Lender Formula
Lending institutions have different formulas. A rule of thumb is that housing, tax and insurance expenses should not go over 30% of your gross monthly income. Tax and insurance usually make up about 15%. The rest can be used for paying interest.
There are other factors that affect how much mortgage you can afford. When checking your possible housing fee, it will be combined with any debt.
The general rule is that the two of them must not exceed 35% of your monthly gross income. This is an important factor to consider. If the total exceeds this percentage, your loan may not be disapproved.
Exceptions to the Rule
As stated, this rule is not set in stone. In addition if you make a substantial down payment, the rates will be more flexible. If your loan is cosigned with a well off individual, the terms will also be more elastic.
To know how much mortgage you can afford, you should do some research first. The competition is forcing lenders to come out with various programs. Look for different types. Some require large down payments but with lower monthly payments. Others have low down payments and variable rates.
A lot of programs offer fixed rate payments for 15 or 30 years. There are advantages and disadvantages with each. The 30 year term offer lower payments than most 15 year agreements. The 15 year term on the other hand, lets you make equity more quickly.
These are the main factors that will let you know how much mortgage you can afford. When thinking of getting a loan, make sure that you go over all the details. This will help get your finances ready to acquire your dream home.