How Much Mortgage Can I Afford?
There may be a recession in the housing market in 2020. There are some people who cannot afford all-cash transactions for buying properties, and they can be asking questions such as “How much mortgage can I afford?”. These are some factors you should consider before availing the loan:
• Determining an Affordable Mortgage
• Lenders’ criteria
• Your credit score
• How to calculate a down payment
• How lenders decide
• Personal criteria for homebuyers
• Pre-mortgage considerations
• Costs beyond the mortgage
Mortgage payments consist of four things which are principal, interest, taxes, and insurance. There are two ratios that should be considered: your front-end ratio will be the percentage of your annual gross income that can pay your mortgage, and in general, it should not exceed 28%; your back-end ratio will be the percentage of annual gross income that can pay your debts. it should not exceed 36%.
- Determine an Affordable Mortgage
You should have an idea of what you consider to be an affordable mortgage. You should know about the cost of the mortgage and you should also think about the lender. Second, you should determine some personal criteria by evaluating not only your finances but also your preferences and priorities.
- Lenders Criteria
As lenders of mortgages determine their own criteria for affordability, they will assess your ability to purchase a home, as well as the size and terms of the loan.
- Front-End Ratio
In front end ration your gross income plays a major role. If you have more gross income, then you have more ability to pay the mortgage amount.
- Back-End Ratio
It is also known as debt-to-income ratio (DTI) as it calculates the percentage of your gross income used for payment of debts. Debts may be credit card payments, child support, and outstanding loans. If your half of your income is used to pay the debt, then we can say that debt to income ratio will be 50%.
- Your Credit Score
Mortgage lenders assess the level of risk of a prospective homebuyer. The risk can be determined by using the applicant’s credit score. If Applicants has a low credit score then he will have to pay a higher rate of interest, so you know you will be looking for a home in the future, work on your credit score now and keep track of it.
- How to Calculate a Down Payment
The down payment is the amount which the buyer can afford to pay in advance. Most lenders demand a 20% down payment for home’s purchase price, but many lenders let buyers purchase a home with a significantly smaller amount. If you can put in a higher amount, then you will need less financing.
For example, if a homebuyer can afford to pay 10% on a $100,000 home, the down payment is $10,000, which means the homeowner will have to finance $90,000.
The terms of financing are very important as well, for if the numbers of years you take the mortgage out for is small, then the monthly payments will be more and vice versa.
- How Lenders Decide
There are different factors in the decision of lenders for mortgage. But basic consideration is income, debts, assets, and liabilities.
A lender will always consider your income, monthly expenses and credit history.
- Personal Criteria for Homebuyers
Many financial experts like to think about net income and say that you shouldn’t use any more than 25% of your net income on your mortgage amount. In addition to the lender’s criteria, you should consider some other issues when contemplating your ability to pay a mortgage.
Income is a basic factor when you think about the mortgage of your home. If you have enough monthly income to pay the monthly installments, then it will be easier for you to think about this, especially if you have a regular income.
The calculation of your back-end ratio can include most of your current debt expenses. You should also think about the other monthly expenses, such as grocery shopping, clothing and bills. If you feel the expense of paying a mortgage would not interfere with your abilities to pay for your other monthly expenses, then you can avail the loan.
If you are thinking you are about to change your lifestyle, then you should think about to build a new home for your family. So, you can avail of the mortgage loan.
As we know that no two people have the same personality when it comes to money. Even with the same income, some people can afford to pay the monthly installments while others may have some problems.
Costs beyond the Mortgage
Although the mortgage amount is the main factor, there are some other expenses that should be considered. Closing costs, points due at closing, private mortgage insurance, title insurance and more.
When you buy a new home, you will have to spend on some other expenses like appliances, (dishwashers, refrigerators etc.), furniture, driveway, carpets, and even redecorating. These are all expenses you should consider with your financing.
Heat, electricity, water, sewage, trash removal, cable television, and telephone services are some utility expenses. We know that these expenses are not included in the front-end ratio and back-end ratio. So, they are unavoidable for most homeowners.
- Association Fees
There is also a need for some home association fees. These fees are generally less than $100 per year, but depending on the benefits of. The home owners association the fees may be higher per month. In some communities, there is a need for lawn maintenance, snow removal, a community pool, and other services. Some fees are used for the administration costs of running the community.
If you need to get a mortgage the first step should be to speak with a mortgage loan originator to get a pre-approval to get a clear idea on how much you could qualify for.