Being a concerned homeowner, you must be aware of the difference between buying a property and affording one. When you plan to acquire a property or to afford a mortgage, it’s imperative to weigh your repayment capabilities. Of course, your bank will scrutinize your profile for your financial strengths. However, on your part, you need to consider several factors that would help you determine your repayment capabilities.
After all, it won’t be a logical decision to commit something that would compromise your lifestyle. Click here to use the affordability calculator and find out how much a mortgage would be ideal for you.
Calculating Your Home Mortgage
Broadly, financial experts recommend using these two rules when it comes to weighting your repayment strengths.
The Annual Salary Rule
As per this theory, the ideal size of your mortgage should not exceed three times your annual salary. Therefore, if you make around $ 70,000 a year, don’t go for a mortgage exceeding $210,000. However, in case you apply for the property with a partner, and the combined income comes to $120,000, you can go for a mortgage up to $360,000 comfortably.
This doesn’t necessarily imply that you need to apply for the most expensive option when choosing the mortgage. However, settling for a loan below the maximum eligibility will help you make savings or carry out renovations.
The Monthly Income Rule
Further narrowing down your calculations, you need to focus on your monthly expenses. As per the thumb rule, most banks will qualify home mortgages where the monthly payments are within 43% of the borrower’s income. Therefore, you won’t have excessive pressure to pay off your debts.
A person earning $5,000 a month can afford an EMI of $2,150. However, banks consider that you would spend 50% of your net monthly income on utilities and lifestyle expenses. Therefore, you need to keep the mortgage payment at less than 50% to leave out adequate funds to meet emergency expenses.
Things To Consider While Calculating Your Home Mortgage
You would obviously consider your income when you decide to purchase a home. The greater your income, the more mortgage you can afford. Therefore, consider these aspects when you start calculating your overall income.
- The basic income
- Investment returns and pensions
- Financial support from ex-spouses
- Income generated from child maintenance
- Commissions, income from freelance work or second jobs
Go through your business accounts, bank statements, and the income tax you shelled out to determine the overall income.
2 Expenses And Debts
Apart from the regular household expenses, you might be paying EMIs for personal loans, credit card loans, student loans, or car loans. The creditors would aggregate the monthly debts you have been paying for the next one year or so. This way, you can determine how much mortgage payment you can afford per month.
In general, you need to consider these factors while calculating your debts.
- Maintenance payments
- Repayments for credit cards
- Any type of insurance premium
- Water, phone, electricity, and broadband bills.
Typically, your expenses should not exceed more than 50% of your monthly income.
3. Down Payment
You can afford a larger amount of home mortgage by shelling out a bigger down payment. Moreover, you can save the amount for your mortgage insurance once you pay at least a 20% down payment for the property. This implies that you would have more cash-free for your interest and principal.
4. Credit Score
A better credit score implies that you have been maintaining sound financial habits. This significantly enhances your eligibility for home mortgages. Moreover, you can qualify for lower interest rates and higher amounts of home mortgage.
5. Closing Costs
You need to consider around 5% of the property value as the closing cost when purchasing as a thumb rule. This, too, goes a long way in determining the amount you can obtain for a mortgage. Besides, the closing costs also affect your ability to make a higher down payment. Once you consult your financial experts, they will guide you about these expenses.
Sometimes, homeowners add the closing costs to the mortgage principal. In these cases, you need to settle with a less expensive property.
6. Homeowners Insurance
When you purchase a new property, you won’t possibly be overlooking the insurance. After all, property purchases happen to be a significant investment in peoples’ lives. You need to get an idea about how much you can pay immediately after shelling out the down payment when you purchase the property. In some cases, you need to go for a lower-end home to manage the premium.
Apart from this, you might also consider mortgage and flood insurance premiums. Once you chalk out all your probable expenses, you will be able to make a sound decision.
Home Mortgage Affordability Based On Type Of Loan
- FHA loan: If you go for an FHA loan, there would be an additional expense as you shell out the mortgage insurance upfront. Moreover, you need to bear the cost of monthly premiums.
- VA loan: Although property owners need not pay the mortgage insurance or down payment in this case, they would have to shell out a funding fee.
- Conventional loan: If you shell out anything lower than 20% of the property value as the down payment, you need to pay a premium for mortgage insurance.
- USDA loan: Here, both the annual and upfront fees would lower the amount of home mortgage you can afford.
While we have considered the current expenses that would affect your ability to pay the mortgage, don’t overlook specific changes that might stress you out financially. Some future changes that might affect your repayment capability include increased interest rates, illnesses, loss of jobs, and changes in lifestyles. In addition, career shifts, having babies, or a break from your career might also affect your ability to repay the loan.
Once you consult the experts, you can have a transparent idea of the estimated home mortgage you should go for.