How High a Mortgage Loan Can I Afford

:: How Much a Loan Can I Afford?

How Much Can You Afford?

Before you start the process of finding a new home, you need to be familiar with your budget. How much can you afford? It is imperative that you find the right price range so that you don’t waste valuable time and effort on a piece of property out of your reach. In order to pinpoint your price range, you need to consider three major factors: monthly income prior to taxes, debts, and cash you accumulate for down payments and/or closing costs.

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Your Monthly Income

It is a general rule of thumb that a potential homeowner should not spend more than twenty-five to twenty-eight percent of their monthly income on housing. Typically, housing expenses are comprised of the monthly mortgage payment plus interest, various property taxes, and insurance. For a Federal Housing Administration (FHA) loan, monthly housing expenses should not exceed twenty-nine percent of the borrower’s monthly income. If you are unsure as to how much your taxes and insurance will amount to, the following statistics can be used as a ruler. Data collected from the American Housing Survey states that the median annual tax owed per $1,000 is approximately $12, and the medium property insurance rounds out to about $30 per month.

When calculating your gross income, here is a list of some of the things you can include:

-steady employment

-overtime bonuses and commissions

-your net income from any form of self-employment

-social security or veteran’s benefits

-retirement benefits

-alimony

-child support

-workman’s compensation and disability

Long-Term Debts

Lenders typically define monthly expenses lasting ten or more months into the future as long-term debt. Lenders also prefer to know about your monthly debts, which often include any other loans (real estate, bank, auto, tuition, etc), revolving accounts, and child support. The sum of your housing expenses and long-term debts should not surpass the amount that is thirty-six percent of your monthly income. You should pay off as much of your debt as you can before applying for a mortgage.

If you have an idea of what you can afford in terms of monthly mortgage payments, you can determine how much you wish to borrow in the form of a loan. Mortgage calculators are designed to help a borrower pinpoint the maximum amount he/she can borrow. This information will also be useful for choosing what type of mortgage works best for you, whether it be a 15-year fixed rate mortgage or a 30-year fixed rate mortgage that requires lower payments.

The Down Payment

When you are applying for a loan, the lender is under the impression that you can afford to make the down payment, which runs up to twenty percent of the home’s askng price. There are also closing costs, which are anywhere between three and six percent of the loan principal.

The following sources are viable options when considering a down payment: savings, stocks, bonds, mutual funds, retirement accounts (IRAs), and so on. If you do not have enough money to put down, you can try to obtain Private Mortgage Insurance, which enables you to get approved for a loan with a down payment of just five percent.