Can you afford a mortgage? 6 factors to consider
As a concerned homeowner, you should be aware of the difference between buying property and affording one.
When considering purchasing a home mortgage, it is imperative to weigh your repayment capabilities. Of course, your bank will review your profile based on your financial strengths. However, there are several factors you need to consider that would help you determine your repayment capabilities.
After all, it won’t be a logical decision to do something that compromises your lifestyle. Click here use the affordability calculator and find out the ideal mortgage amount for you.
Calculate your mortgage
Generally speaking, financial experts recommend using these two rules when it comes to weighting your repayment strengths.
The annual salary rule
According to this theory, your ideal mortgage size should not exceed three times your annual salary. Therefore, if you make about $ 70,000 a year, don’t go for a mortgage greater than $ 210,000. However, if you are applying for the property with a partner and the combined income is $ 120,000, you can opt for a mortgage up to $ 360,000 comfortably.
This does not necessarily mean that you should ask for the more expensive option when choosing the mortgage. However, settling for a loan that is below the eligibility limit will help you save money or make renovations.
The monthly income rule
As you refine your calculations further, you need to focus on your monthly expenses. As a rule of thumb, most banks qualify home mortgage loans with monthly payments less than 43% of the borrower’s income. Hence, you will not have undue pressure to pay off your debts.
A person who earns $ 5,000 a month can afford an IME of $ 2,150. However, banks consider that you would spend 50% of your net monthly income on utilities and lifestyle expenses. Therefore, you should keep the mortgage payment below 50% to set aside sufficient funds to meet emergency expenses.
Things to consider when calculating your mortgage
You obviously have to take your income into account when deciding to buy a home. The higher your income, the more mortgage you can afford. Therefore, take these aspects into account when you start to calculate your overall income.
- Basic income
- Return on investment and retirement
- Financial support for ex-spouses
- Income generated by maintenance of children
- Commissions, income from self-employment or a second job
Go through your business accounts, bank statements, and the income tax you paid to determine overall income.
2 Expenses and debts
In addition to running household expenses, you could pay EMIs for personal loans, credit card loans, student loans, or car loans. Creditors would aggregate monthly debts that you’ve been paying for about a year. That way, you can figure out how much mortgage payment you can afford per month.
In general, you should take these factors into account when calculating your debt.
- Maintenance payments
- Refund of credit cards
- Any type of insurance premium
- Water, telephone, electricity and broadband bills.
As a general rule, your expenses should not exceed more than 50% of your monthly income.
You can afford a larger mortgage with a larger down payment. Plus, you can save your mortgage insurance amount once you’ve made a down payment of at least 20% for the property. This implies that you would have more cash for your interest and principal.
4. Credit score
A better credit rating implies that you have maintained healthy financial habits. This greatly improves your eligibility for mortgage loans. Plus, you can benefit from lower interest rates and higher mortgage amounts.
5. Closing costs
As a general rule, you should consider around 5% of the value of the property as the closing cost when buying. This too goes a long way in determining the amount you can get for a mortgage. Additionally, closing costs also affect your ability to make a larger down payment. Once you have consulted your financial experts, they will guide you on these expenses.
Sometimes homeowners add closing costs to the mortgage principal. In these cases, you need to settle with a cheaper property.
6. Home insurance
When buying a new property, you are probably not neglecting insurance. After all, buying a property turns out to be a big investment in people’s lives. You need to have an idea of ââhow much you can pay immediately after you make the down payment when you buy the property. In some cases, you have to go for a low end home to manage the premium.
Apart from this, you can also consider mortgage insurance and flood insurance premiums. Once you have noted all of your probable expenses, you will be in a position to make an informed decision.
Mortgage affordability by type of loan
- FHA loan: If you go for an FHA loan, there would be an additional expense as you will shell out the mortgage insurance up front. In addition, you have to bear the cost of the monthly premiums.
- VA loan: While homeowners don’t have to pay mortgage insurance or the down payment in this case, they would have to pay a finance charge.
- Conventional loan: If you pay less than 20% of the value of the property as a down payment, you must pay a mortgage insurance premium.
- USDA loan: Here, the annual and upfront fees would reduce the amount of mortgage you can afford.
While we’ve factored in the ongoing expenses that might affect your ability to pay the mortgage, don’t overlook specific changes that might put you under financial stress. Some future changes that could affect your ability to repay include increased interest rates, illnesses, job losses, and lifestyle changes. In addition, career changes, babies, or an interruption in your career can also affect your ability to repay the loan.
Once you have consulted the experts, you can get a transparent idea of ââthe estimated home mortgage you should go for.