You’re a bright-eyed prospective homeowner, on the hunt for your dream house: likely, you’re seeking the answer to the question “How much house can I afford?”
With virtual online tools and field experts waiting to guide you in the right direction, settling on a balanced mortgage plan can be a rewarding, streamlined process with long-term implications for your financial health. By keeping several key financial factors in mind, you can settle on the right plan to pay off your mortgage while maintaining the value of your new home. In this article, we go over some key points to consider when settling on the right mortgage plan for you.
It must be said that the amount of money you’ve set aside for a down payment will affect the terms of your mortgage payment as well as the terms of any loans you may wish to take out. Obviously, the more money you can set aside, the better—but some lenders (like those offering VA Loans) will even cover the cost of the initial down payment! It’s worth researching mortgage assistance programs to find a lender compatible with the size of your down payment; for more information on FHA Loans, VA Loans, and Adjustable-Rate Mortgage Loans, click here!
Perhaps one of the most crucial aspects to consider when planning your mortgage is your debt-to-income ratio. This is one of the primary metrics that lenders look at when calculating the amount of money the borrower is able to obtain.
As a general rule, housing costs shouldn’t exceed 28% of your monthly income.
If you know that your housing costs should stay at 28% of your monthly income or lower, it is simple to calculate an adequate budget for your house. Simply multiply your monthly income (before taxes) by 0.28. If you make $5,000 a month, multiply this by 0.28 for a total of $1,400. You should look for a house that meets or is less than this number each month for mortgage payments.
Alternatively, you can calculate your current debt-to-income ratio by dividing the amount of money that remains after taxes are taken out of your pay by the amount of your pay before taxes. For example, if you have $1,600 left on your paycheck after taxes from an initial sum of $5,000, your debt-to-income ratio is 32%. Because you know the recommended debt-to-income ratio is 28%, you may want to look for an additional source of income or a cheaper living arrangement based on this fictional scenario.
We can’t mention the 28% debt-to-income rule without mentioning the accompanying 36% total debt rule. This guideline dictates that a mortgage payment should not exceed 28% of your total monthly income or 36% of your accumulated debts. This includes credit cards, student loans, etc.
While the 28%/36% rule is a good starting point for determining how much mortgage you can afford, it is not the end of the story. There are many factors that influence your mortgage plan, including existing debts and expenses, cash savings, monthly income, and credit score.
Finding the right mortgage plan for your budget doesn’t have to be overwhelming. With the help of experts like those at MCS, you can develop a payment plan that fits your financial situation to connect you with the house of your dreams! Want to learn more? Click the link to get started!
