How do you know how much you can spend on a mortgage each month if you've never done it before?
If this is your first time in the real estate world one of the biggest questions is how much home can you afford? Well, that's all relative and it comes down to your income and how much you have going out each month. Determining how much you can afford may sound simple and YOU may think you can afford a certain amount but lenders will only give you the funds THEY think you can afford. So how do you know?
Let's start with income.
Have you been at your job for at least a year? You're doing pretty good. The longer you've been at your job collecting a steady paycheck the better it looks to employers, even if you don't think you make that much. Lenders want to see you are stable and can be responsible in your employment. Lenders will take a look at all your income including any annuities, alimony or child support. Lenders will also take a look at any assets you might have. Maybe you have an IRA, investment funds or other assets that can build your net worth. This is all important to a lender who is going to lend you thousands of dollars.
Now let's look at your liabilities.
Liabilities are a financial responsibility that is required each month. This could mean your existing rent, utilities, student loans, car payments, credit card loans, or anything else where money is going out on a regular basis. Obviously, people are going to have items such as utilities, phone bills etc., but not everyone will have a credit card loans or student loans. Lenders look at how much is going out each month to determine how much you can afford in a mortgage payment. Of course, if you're paying rent now, you probably will not be paying rent once you move out so that money will get converted to a mortgage payment.
The more debt you have the harder it is to get a loan. That's just the cut and dry of it. Lenders don't want you adding on more debt if they feel you are already maxed out. Depending on the type of loan you're looking for, lenders look for at least a 40% debt to income ratio. This means that no more than 40% of your income should go to a debt of any kind. There are different types of loans in that some will allow up to 43% and some even 50%. The term "affordable housing" is usually where the debt to income ratio is lower than 30%.
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If lenders determine that you can take on a mortgage payment they will figure out how much that mortgage payment will be each month and then determine the max price for a home you can afford.
For instance: let's say that you can afford a $1500 mortgage payment. Once you add taxes and insurance to the monthly payment that could go up to about $1700 per month. That's roughly equal to between $250,000 and a $300,000 loan based on the terms and your interest rate at the time. Lenders will tell you that you've been approved up to a certain amount. Now, that's not to say that you have to spend the entire amount that you are approved for. This is the maximum amount your budget can allow. It's wise to go just below that or even farther below that if you can in order to free up some funds during the month so that you are not maxed on your mortgage payment.
Determining how much you can afford is something you could do on your own but to really apply for a loan and get that approval from a lender, you have to go through a lender or loan officer to determine the exact amount.
Because I deal with people in the Columbus Ohio area I have reputable loan officers and mortgages advisors standing by to help you figure out exactly how much home you can afford. Give me a call today.