How Much Should My Mortgage Be?
The main thing that you and your lender should be concerned about is not the total mortgage amount. Rather, your focus should be on monthly mortgage payments and whether you can easily afford them.
Lenders use your debt-to-income ratio (DTI) as a measure of affordability. And they consider a 36% DTI to be excellent.
Ideally, this means that your monthly debt, including the mortgage payment, is no more than 36% of your monthly income. But lenders can be flexible. So if your DTI is a little higher then don’t worry.
The trick is to find the right loan amount and mortgage program for your situation. Here is how.
Check Your Mortgage Eligibility (April 26, 2021)
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Mortgage Payments and Income
Your mortgage should be an amount that you can comfortably afford within your monthly budget. So, in determining the correct loan size, you have to work backwards – find the correct monthly payment first and calculate the home price based on that number.
When it comes to monthly payments, one number is crucial to what you can afford: your debt-to-income ratio.
Of course, other factors also play a role, such as: B. Your creditworthiness, mortgage rate, and down payment.
However, DTI has a huge impact on affordability. Hence, it is important to understand how mortgage lenders look at this number.
What is your debt-to-income ratio (DTI)?
Your DTI is the percentage of your gross monthly income (before taxes) that you devote to inevitable financial obligations – in other words, debt.
These include payments for your new home, credit card minimum payments, fixed payments for car loans, student loans, and other loans, and child support and child support payments.
But your DTI does Not Include discretionary expenses. So you shouldn’t include groceries, gasoline, utilities, dining out, cell phone and internet bills, and any other expenses that you can control each month.
How DTI Affects Your Mortgage
Why is DTI the Key to Your Mortgage Loan Amount? Because the more you spend on debt, the less money you will have to pay for your mortgage.
Some types of loans allow higher DTIs than others. However, for most mortgages, lenders want you to have a DTI of 43% or less.
For example, suppose you have a gross monthly income of $ 5,000. You’re already paying $ 1,000 a month on existing debt. How Much Mortgage Can You Afford?
- Maximum DTI: 43%
- 0.43 x $ 5,000 = $ 2,150
- Maximum Debt Payment: $ 2,150
- Existing Debt: $ 1,000
- Maximum Mortgage Payment: $ 1,150
Now you know the only way to afford a home is if the monthly payment is $ 1,150 or less.
Remember to consider property taxes, homeowner insurance, and personal mortgage insurance (PMI) when estimating your mortgage payment.
Depending on your lender, a DTI over 43% may be acceptable.
For some compliant loans, Fannie Mae and Freddie Mac have set their maximum DTIs at 45% to 50%. And it’s possible to get an FHA or VA loan with a DTI of up to 50%.
However, you will likely need offsetting factors to make up for the high DTI – like a large down payment or good credit.
Find Out How Much Home You Can Afford (April 26, 2021)
How much should my mortgage be in the real world?
All of this math can seem a bit theoretical. And your goal in deciding your mortgage amount should be more practical. You want a loan that fits your lifestyle, needs and ambitions exactly.
The fact that a lender is giving you $ x USD based on your DTI, credit score, down payment, and personal finances does not necessarily mean that you should borrow $ x USD.
Yes, most of us borrow up to the maximum amount allowed. But that doesn’t mean you should.
What are your spending priorities?
It all depends on your lifestyle and priorities. Say you love traveling abroad or gourmet food, sailing, or shopping. Borrowing the maximum amount could mean sacrificing other luxuries in the years to come.
Opting for a more modest home and a smaller mortgage might be best if that allows you to stick with your current lifestyle.
How secure is your income?
You should also consider how secure your earnings are.
You probably don’t want to get the biggest mortgage possible if you have a job that makes layoffs the order of the day – or if you plan to change jobs soon and aren’t sure you’re making the same amount.
Lenders also take these issues into account. Because of this, they usually want to see a two year employment history on your mortgage application. You also want to know that any revenue you use to qualify for the loan will persist for at least three years.
Examples of mortgage payments
Here are just a few examples to show you how factors like DTI and credit can affect your home buying budget.
Million dollar house
The mortgage reports examined the question of how much income you need for a million dollar home. And the answer resulted in a surprisingly wide range of returns.
We found that a “top-notch” borrower (with a small DTI, great credit score, and a 20% decline) could potentially buy a $ 1 million home with a household income of only $ 100,000.
But someone with a lot of existing debt, moderate credit, and the smallest down payment allowed could need an annual income of $ 225,000 to buy the same house.
Where from? Well, as we just discovered, your income is only part of what determines your maximum mortgage loan capacity.
Your debts play a huge role, as do your creditworthiness and the size of your down payment.
$ 100,000 salary
We also answered the question of how much house can I afford if I make $ 100,000 a year?
Again, the answers were very different depending on the same factors: DTI, credit score, and down payment.
Borrower 1 with a credit score of 760, no existing debt, and a 20% down payment may be approved for a loan of approximately $ 721,000.
But Borrower 2 with a credit score of 650, monthly debt payments of $ 250, and a down payment of 15% may only be offered $ 561,000.
That’s a $ 160,000 difference in the homes these two borrowers can comfortably afford – despite making the same amount of money.
Also, remember that you must be in seriously good financial condition to get the best deal and the lowest mortgage rates. Everyone else is paying a little – or a lot – more.
Find Out How Much Home You Can Afford (April 26, 2021)
How to Get a Bigger Mortgage
You can afford a more expensive home by following three simple steps to prepare for a mortgage application:
- Pay off some debts, particularly credit card balances. Not only are you reducing your DTI, but lowering your card debt should improve your credit score too
- Save a larger deposit. The more skin you have in this game, the more lenders like you. A larger down payment often brings you a lower interest rate and / or a better home
- Work on your credit score. Often times, as long as you pay bills promptly, credit card balances are the main drag on your score. Each must be below 30% of the card’s credit limit. Also, avoid opening and closing credit accounts in the months leading up to a mortgage application
Of course, these steps can be easier said than done, especially for a first-time home buyer.
How are you supposed to reduce debt while increasing your savings? It is often difficult to cover monthly expenses.
But almost everyone – at least almost everyone with home ownership plans – can make savings on their household budgets. And it’s surprising how often just a small improvement in your DTI, down payment, or credit score can make a big difference to the mortgage business on offer.
So do what you can. But if your financial situation is not perfect, don’t let that stop you. Mortgage programs today are flexible and you will be surprised what it takes to qualify.
Check Your Mortgage Eligibility (April 26, 2021)
How to calculate your DTI
In this article, we’ve talked a lot about the debt-to-income ratio. Knowing yours is key to learning how much home you can afford.
In case you’re wondering, you can calculate your own DTI rate for mortgage qualification here.
First, add up all of the monthly expenses that are included in your DTI:
- Estimated monthly housing costs (you can use a mortgage calculator for this)
- Minimum deposit by credit card
- Car payments
- Other monthly loan payments
- Obligations such as maintenance and child benefit
Next, you need to know your gross monthly income.
Remember, this is the highest number on your pay slip. In front Tax deductions and so on. If your income varies significantly – possibly seasonally – use an average over the past year or two.
Now divide the first number (total monthly debt) by the second (pre-tax income).
The Consumer Financial Protection Bureau federal regulator gives an example:
“If you pay $ 1,500 a month for your mortgage, and another $ 100 a month for a car loan, and $ 400 a month for the rest of your debt, your monthly debt payments will be $ 2,000. ($ 1500 + $ 100 + $ 400 = $ 2,000.)
“If your gross monthly income is $ 6,000, your debt to income ratio is 33 percent. ($ 2,000 is 33% of $ 6,000.) “
If you’re using a calculator, you need to multiply the result by 100 to get a percentage. So your display says 0.3333, but your DTI is 33.33% (33% if rounded by your lender).
What are today’s mortgage rates?
Prices are still low today, which is great news for home buyers. The lower your interest rate, the more real estate you get for your dollar.
Remember, there is no “perfect” amount to spend on your home loan. The decision is personal – it depends on how much you earn, how much you currently spend each month and what is the housing benefit payment that you are happy with.
Do some research on your options, check your interest rates, and choose the right mortgage amount for you.
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