One of the first steps you must take in buying a home is determing how much mortgage you can afford. The lender's mortgage limits will take into account a variety of factors, such as your income, your debts, your down payment, and more.
In determining mortgage limits, lenders follow a general rule of thumb that your monthly mortgage payment (including principal, interest, property taxes and insurance) should not be more than 25% to 28% of your monthly pre-tax income. FHA loans set the mortgage limit at 29%
If you already have found the house you want to buy, the seller will be able to tell you how much the property taxes on the house will be. If you don't yet have a house in mind, contact the city clerk's office in the area you want to buy to find out what the property tax rate is.
In determining how much mortgage you can afford, lenders will take into account more than just your hourly wage or your salary. They will also look at the amount of overtime pay you've had for the previous year or two, your net income from self employment, any benefits you receive from Social Security, veteran's benefits or retirement income, alimony, child support, public assistance, workman's comp or disability payments, interest and dividend income, and other sources.
Mortgage limits are also affected by your debts. Lenders will asess how much mortgage you can afford by looking at all of your other monthly payments, including charge cards, car loans, student loans, real estate loans, alimony, child support...in short, any long-term debt payments that you must make to companies or individuals each month. "Long term debt" is usually considered to be any monthly expenses that will need to be paid for at least ten months.
Generally speaking, lenders are comfortable if your monthly mortgage payments plus any other debt payments are less than 33% to 36% of your monthly pre-tax income. FHA loans offer a little more leeway by setting a limit of 41%.
You can increase your mortgage limits by lowering your debts. Before you begin shopping for a mortgage, try to eliminate as many debts as possible.
To get an idea of how much your monthly mortgage payment will be, use our monthly mortgage calculator, or our home affordability calculator. Experiment using different mortgage terms: 15 year, 20 year, and 30 year, for example. You may find that your best option is to get a mortgage with a longer term.
Mortgage limits are also affected by the down payment. The more money that you can apply to your down payment, the better. A large down payment will result in a smaller monthly mortgage payment. Not only will you have a smaller payment, but you'll save money over time as you won't be paying as much interest.
Lenders typically expect borrowers to make a down payment of 20% or so of the price of the home. Your down payment can come from a variety of sources, but it cannot be borrowed money. You can use money from savings, investments, the sale of assets, or pretty much any source other than borrowed money. In some cases, you're allowed to use money gifted to you from relatives.
If you can't come up with 20% to put down on the house, there are other options. You can get private mortgage insurance, which will allow you to put down as little as 5%. Or you can get an FHA loan, which has down payment amounts as low as 3%. If the home you're looking at is in a rural area, and your income is considered to be low to moderate, you may qualify for an RHS loan, which usually requires no down payment. Or, if you qualify for a veterans loan, you can get a mortgage without a down payment.
In determining how much mortgage you can afford, don't simply look at the lender requirements. Consider, too, that you'll have upkeep on the house. Also keep in mind other things that affect your quality of life, such as entertainment, vacations and, of course, your family.
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