If you are in the market for a new home, you are probably wondering how much of a home you can really afford. The affordability of a new home depends on several factors: your monthly income, your monthly recurring debt and how much money you have saved for a down payment. Additionally, your credit rating will have a large impact on the mortgage interest rates for which you qualify. The mortgage payment calculator is a really useful tool in this process.
Your Monthly Income
The amount of your monthly income is critical to determining how much of a home you can really afford. If you draw a regular salary, calculating your monthly income will not be difficult. If, however, you are self-employed or work on a commission basis, determining a realistic monthly income may be a bit trickier. There is, of course, a difference between an aspirational monthly income and your real monthly income. The first step to determining how much home you can truly afford is to realistically calculate your monthly income and to determine if that income will continue for at least two years.
Monthly Recurring Debt
Recurring debt are items such as credit card payments, car loans, utilities, and so on. Tabulating your necessary monthly payments will help you to determine how much you can pay each month for a mortgage loan. A general rule of thumb in the mortgage industry is that a borrower’s mortgage loan, including taxes and insurance, and his or her recurring monthly payments should not exceed 43% of the borrower’s monthly income. Underwriting guidelines will differ between lenders, but a good ballpark figure to not exceed is in this neighbourhood.
You will need some savings to pay a down payment and closing costs. If your credit rating is excellent, you will be able to qualify for a mortgage loan that only requires a 5% down payment or less. If your credit is average, you may be required to make a down payment of $10- %. Evaluating your personal credit rating, the size of the home you would like to purchase and the necessary down payment will help you to determine how much of a home you can really afford at this time.
One of the primary requirements of various mortgage loan programs is your credit score. The higher the score, the lower the interest rate. Before applying for a mortgage loan, obtaining a copy of your credit report is highly advisable so that you can make sure it is accurate. If you do have derogatory items on your credit report, you can dispute them and have the items removed prior to your mortgage application. This process can take a few months, so starting the process a few months before you plan on buying a new home is important.
These are some of the necessary steps for determining how much of a mortgage loan you can truly afford. Realistically evaluating your monthly income, debts and savings is a critical part of the process. Reviewing a copy of your current credit report is also a core component of evaluating how much of a down payment you will be required to make, which will impact the cost of the home you can afford.