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Find out how much mortgage you can afford using your current income and today’s interest rates!
Before you shop for a new home you should get pre-approved for a mortgage so you know how much home you will be able to afford. It is a big help to you and your real estate agent as well as any potential sellers. If they know you are pre-approved for a certain amount when you make the offer then they will feel more comfortable with your offer, which could help in competitive markets.
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Factors Affecting Home Affordability
Income
Mortgage lenders pay a lot of attention to the annual income of the borrower to determine affordability. You can work out “how much mortgage do I qualify for,” by doing your homework. To do that, calculate your total income (if applicable, add the co-borrowers income too) and then determine what mortgage payment you will be able to make on a consistent basis. Remember to take into account your monthly expenses as well and consider the possibility of running into unexpected costs.
Debts
Even though it would be ideal to have no debt at all, it is impossible in many cases. That’s because almost everyone has a student loan, credit card loan, and an auto loan to take care of. Not all of these debts disqualify you from getting a mortgage loan, but they can decrease your capacity to borrow. Majority of the lenders expect the borrowers to have a debt-to-income ratio that is 36% or less of the individual’s gross monthly income. For example, if your monthly household income is $4,500 (54k a year), your monthly mortgage payment shouldn’t be more than $1,620.
Down Payment
Being able to make monthly mortgage payments is not the only criteria that the lender is looking for. The down payment for any mortgage is a significant amount that needs to be considered before coming up with a budget. When trying to answer the question, “how much mortgage can I afford?” make sure that you take into account the down payment requirement as well. A majority of the lenders ask the borrowers to put forward at least three percent. A higher percentage in down payment can help you get a lower interest rate and reduce the number of your monthly mortgage payments.
Mortgage Rate
The fluctuations in mortgage rate are not uncommon. These rates have a significant impact on a person’s ability to afford a house. The mortgage rates today are considered to be less than before, which is why it has become more affordable for buyers to invest in a new home. However, staying aware of the current mortgage rate is extremely important when trying to answer, “How much house can I afford?” However, if you decide to get a fixed-rate mortgage for your house, the interest rate will remain the same over the term of the loan. All of these factors have caused the affordability of an average buyer to increase.
Credit Score
Your credit score is another crucial element that will be looked at by the lender. This is because the credit score of a person serves as an indicator of the debt choices that he/she makes. Due to this reason, borrowers who have a high credit score do not face a lot of problems when trying to get a loan for their house. However, at the same time, it does not mean that having a low credit score makes it impossible for you to own your dream home. You can work towards improving your credit score before you decide to own a house or agree on a higher interest rate if you can afford to make regular monthly payments.
The Term of the Loan
Your affordability will also depend on the term of the loan. When you are trying to decide whether you can afford a particular home or not, you should first consider how long it is going to take you to pay off the loan entirely. Some people prefer having a loan term that is longer so that they have a significant amount of time. However, you should also take into account the future changes that you expect will occur during this period. Most of the lenders offer a 30-year loan term. However, if you do not feel secure in your current job or are planning to have a baby or make a significant life change, it is better to remain realistic while determining your affordability.
Property Tax
It is difficult for you to determine the exact amount for property tax that you will need to pay in the future. This is because the amount of property tax will depend on the value of your house at a particular point in time and will therefore vary. However, the tax is an essential requirement, and you should make the payments on a regular basis. Therefore, it is crucial that you get an estimated amount of property tax with the help of a mortgage income calculator to determine your affordability.
Home Insurance
Having home insurance helps you remain prepared for any unexpected expenses that you might run into. Moreover, lenders require you to have home insurance before they decide to back you up financially. Your home insurance premium will depend on many factors, such as the location of your property, the materials used in construction, and the age of your home. Home insurance providers also look at your credit score before giving you a quote since they want to ensure regular payments. You can personalize your home insurance plan if you can foresee your needs and home-related expenses. However, based on the changes that you make in your home insurance plan, your premium will vary.
Location of Your Home
A lot of your expenses will depend on the location of your home. You should find out beforehand whether your home is a part of HOA or not. You will need to make extra payments if your home is a part of HOA. In addition, if the location of your home is high-end, you will need to pay higher property taxes, home insurance, and maintenance and security costs.
If you would like more information on factors that will affect your home buying power then view our detailed article on How Much Home You Can Afford.
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