The mortgage application process involves a buyer’s due diligence in calculating how much mortgage they can afford. Mortgage affordability depends on several factors that lenders use at their discretion to determine if and how much they can accord.
Buying a property with a mortgage is often a costly investment, especially for first-time homebuyers. Since this is likely to be the biggest purchase in your life, figuring your mortgage affordability is a fundamental aspect of the homebuying process.
How much of a mortgage can you afford? Figuring how much mortgage you can afford depends on various determinants. Below is an explanation of the mortgage application process, including your mortgage affordability.
When looking to buy a home, your first step should be to figure out how much you can afford. A mortgage affordability calculator takes all the determinant factors automatically into consideration to help you determine your affordability.
To use this calculator, you will be required to input your income and your co-applicant’s income (if applicable). You will be required to include income from every source, from rental earnings to investment profits and alimony. You will also be required to input your debt payment and living expenses.
The calculator uses these numbers to calculate how much of a mortgage you can afford. Changing your mortgage rates and amortization periods allows you to see the effect on your mortgage affordability and monthly service payments.
It is advisable to be realistic about your monthly income and expected expenses. You should also leave some room in your budget for unexpected costs or emergencies.
Generally, financial advisors recommend following the 28/36% rule when figuring out your budget. This rule requires spending not more than 28% of your total income on housing expenses and 36% on your debts. The 28/36% is a time-tested and tried rule that forms the foundation for how much you can afford monthly to serve your mortgage.
While different mortgage lenders use their criteria to determine mortgage affordability, below are the common factors that may determine how much of a mortgage you can afford:
1. Gross income (monthly income)
Your gross income is essentially your base salary plus bonus income. It may also include part-time earnings, part-time earnings, and Social Security benefits.
2. Front End Ratio and Back End Ratio
The front-end ratio, also known as the mortgage-to-income ratio, is the percentage of one’s annual gross income deductible to pay the mortgage monthly. The back-end ratio (debt to income ratio) calculates the gross income percentage required to cover debts.
3. Credit Profiles
One’s current credit score and the debt owed influence the lender’s perspective towards the borrower. Your credit score impacts how much mortgage you can borrow.
4. Cash Reserve
It is the amount of money you have to make a down payment as well as handle any closing cost.
This is the amount of money you can afford to pay out-of-pocket for your home. You can use liquid assets or cash. Most lenders demand a down payment of a minimum of 20% of the home’s buying cost.
Generally, the higher your down payment, the less financing you will need, and the more favor you gain from the bank. Lenders also want to know how many years one needs the mortgage loan for. Short-term mortgage loans typically attract higher down payments but tend to be less costly over the loan’s duration.
Fortunately, you don’t necessarily need to pay the minimum 20% down payment to access your mortgage. It is easy to get a new home with less cash in hand. You can find programs that make mortgages available with as low as a 3.5% down payment. Generally, different government and first-time homebuyers programs are available for buyers with little to no down payments.
There are different ways to determine how much of a mortgage you can afford from a lender. The mortgage affordability calculator is one of the most commonly used methods to calculate mortgage affordability and determine a budget for the mortgage payment.
However, lenders also use different factors to assess your affordability. It is essential to set reasonable expectations when calculating your mortgage affordability to avoid getting overwhelmed in debt.
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