One of the first questions people ask themselves when they begin to look for a house is “how much house can I afford?” This is a very important question because failing to answer it right may lead to financial ruin. Despite the attractiveness of investing in a grand, opulent house, one must be practical about it and consider one’s capabilities. This article will explain how you can figure out the maximum home loan amount you are eligible for.
Assess Your Income
The first and vital thing in determining your maximum affordable home loan is to determine your gross annual household income. List conservative sources of income, such as your salary, and that of any partner, who is likely to contribute towards the payment of the mortgage. As a rule, constant income for the last two years is obligatory for submission, so prepare copies of your tax returns, check stubs and bank statements. If you are paid irregularly, for instance through bonuses or freelance work, then ensure you budget basing your income more on the lower end rather than basing it on the higher end. The more realistic you are, the better you will be prepared for what lies ahead.
Check and evaluate the debts and financial commitments
Another important requirement is complete awareness of current loans and financial obligations that exist with a business partner. Make a file containing documents to do with credit cards, automobile loans, student loans, maintenance for children, alimony and any other liabilities or monthly payments that have to be made. This paints a clear picture of your present and continuous monthly commitments which mortgage lenders will use to judge your ability to handle a given loan size.
The 36% rule is used to calculate the total monthly obligations, including the future mortgage, for the future home. The lower this ratio, the better – because it means you can afford more house – so, where possible, try and pay off existing debts before you apply for a home loan.
Determine Down Payment
Another consideration is the down payment amount that one is capable of making as this determines mortgage and rates. While most traditional loans have a 20% down payment minimum if one wants to get the best rates, FHA loans can be secured with as little as 3. 5% down payment. So, the larger sum of money that you can provide as a down payment, the more favorable mortgage conditions you can get.
Plan On Closing Costs
Another crucial cost that you should factor in when estimating the cost of a home is the real estate purchase closing costs, which range from 3%-6% of the total home sales price. These include, but are not limited to, the following: Origination fees, application fees, inspection fees, taxes, insurance, title search fees, legal fees, and others. The last thing you want is to realize too late that you can’t afford these closing expenses in addition to your down payment. This money will prove to the lenders that you are financially capable of meeting your obligations.
Get Approved for a Mortgage Before You Shop
The lenders will then decide on the amount you qualify for depending on your income, current liabilities, credit score, and the down payment you plan to make. This informs sellers that you are a genuine buyer, and the interest rate will not change in the next years. This is preferable to getting prequalified, which is based on the information you input but is not verified. The preapproval letter gives you an idea of the mortgage amount, type and the terms that are available to you.
And now the fun begins, with a mortgage preapproval letter in your pocket! You can start to look for homes that you would actually like to buy within the price range that you’ve been pre-approved for meaning that you will not have to worry about how you will be able to afford a particular house.
Total affordable housing expenses are as follows:
In general, people should not spend more than 28 percent of their gross monthly income to pay for housing expenses. This should include your mortgage principal/interest, property taxes, homeowner insurance, mortgage insurance if you have one, and homeowners association fees if you live in a subdivision. Ask for prospective taxes and insurance costs on the houses that you are interested in, so as to ensure that the targeted house falls easily within the 28% range.
Crunch The Numbers
Next up is the calculations with mortgage calculators! Aim at the price of the target home, estimated rates, and the down payment amount to give an estimated monthly payment of both the principal and interest. Check the total of monthly expenses on housing will not exceed 28% of gross monthly income, with taking into account of any other current debts.
If the numbers coincide with the maximum of your budget, then it means that this home is indeed, affordable. However, if the payments exceed your limits do not panic. It may be possible to put more down to reduce the loan amount, or to decrease the price range and be more selective in the houses being considered. All in all, you will be able to find a home that will suit your budget after making some modifications.
Closing Thoughts
Deciding just how large of a home you can afford involves research on your individual financial state, receiving preapproval for a home loan that you meet the requirements for, and then planning within your means. Even when purchasing a home – an activity considered by many as a mark of financial stability – do not let your emotions get in the way of sound financial decisions. The last thing anyone wishes for is to be housebound by heavily investing in a home only to face foreclosure problems in the future. When you stick to the basic affordability rules, you can have your new home for many years to come.
