Ugh This Is Making My Head Hurt
Yup. Mortgages arent fun. Still, a house is one of, if not the, most expensive thing youll ever spend money on so its best to give it a ton of consideration. Being saddled with an unruly mortgage will affect you for years and years. To that end, the more thought you give it now, the less worry youll have later. So remember, the question isnt just How much mortgage can I afford? but How much mortgage do I want? for the long term.
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Check Your Credit History
When you apply for a mortgage, lenders usually pull your credit reports from the three main reporting bureaus: Equifax, Experian and TransUnion. Your credit report is a summary of your credit history and includes your credit card accounts, loans, balances, and payment history, according to Consumer.gov.
In addition to checking that you pay your bills on time, lenders will analyze how much of your available credit you actively use, known as credit utilization. Maintaining a credit utilization rate at or below 30 percent boosts your credit score and demonstrates that you manage your debt wisely.
All of these items make up your FICO score, a credit score model used by lenders, ranging from 300 to 850. A score of 800 or higher is considered exceptional 740 to 799 is very good 670 to 739 is good 580 to 669 is fair and 579 or lower is poor, according to Experian, one of the three main credit reporting bureaus.
When you have good credit, you have access to more loan choices and lower interest rates. If you have poor credit, you will have fewer loan choices and higher interest rates. For example, a buyer who has a credit score of 680 might be charged a .25 percent higher interest rate for a mortgage than someone with a score of 780, says NerdWallet. While the difference may seem minute, on a $240,000 fixed-rate 30-year mortgage, that extra .25 percent adds up to an additional $12,240 in interest paid.
Reason #: A Mortgage Is Cheap Money
Mortgages, in fact, are the cheapest money you will ever be able to borrow.
You get a loan when you demonstrate you have the ability to repay it. But how much interest will you have to pay? The more confident the lender is that it will get its money back, the less interest it will charge you. By offering your house as collateral, you agree to let the bank have your house if you dont repay the loan. This dramatically reduces the banks risk, resulting in a very low interest rate.
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Why Your Debttoincome Ratio Is Key
While many factors impact the amount you can borrow, your debttoincome ratio is essential to the equation.
DTI compares your monthly gross household income to the monthly payments you owe on all your debts including housing expenses. The standard maximum DTI for most mortgage lenders is 41 percent.
To achieve a 41 percent DTI with a $50,000 annual income , you couldnt exceed $1,700 a month in housing and other debt payments.
The less you spend on existing debt payments, the more home you can afford and viceversa.
Say $400 of your monthly debt payments go to a car loan, a student loan, and minimum payments on your credit card debt. In this case, you would have $1,300 to spend on housing.
With a $10,000 down payment and 4% interest rate, you could probably buy a home for a maximum price of around $200,000 and still have a $1,300 monthly payment.
If you had no existing monthly debts, you could spend $1,700 a month on your mortgage payment and still keep a 41 percent DTI.
In this case, your home buying budget would increase to about $300,000 even with the same $10,000 down and 4% interest rate.
Thats an additional $100K in home buying power all because of a reduction in your existing monthly expenses not an increase in your annual salary.
Frontend vs backend ratios
As you shop around between mortgage lenders, you may come across the terms frontend ratio and backend ratio.
Whats Behind The Numbers In Our How Much Can I Borrow Mortgage Calculator
When buying a home, the question How much can I borrow? should be the second question you ask. The most important consideration is, How much house can I afford? Thats because, even with all the angst involved in applying for and being approved for a home loan, lenders are often inclined to loan you more money than you expect.
Thats a surprising and important reality.
As much as you want to buy a home, lenders want to loan you money. And the bigger the loan, the happier they are. Youll know why when you see the estimate of the interest youll pay over the life of the loan. Its a really big number.
But if you know how much home you can afford, of course, youll want to learn how much you can borrow. The NerdWallet How much can I borrow? calculator can give you a solid estimate.
The calculator considers standard mortgage payment elements, such as principal and interest. Then, we take things a few steps further, factoring in taxes, insurance even homeowner association dues to help determine a real-life monthly payment.
We also examine your income and debt, just as a lender would, to determine the maximum home loan amount youre likely to qualify for.
Getting ready to buy a home? Well find you a highly rated lender in just a few minutes.
Enter your ZIP code to get started on a personalized lender match.
Read Also: Is A Home Loan A Mortgage
What Do You Mean
OK, for example, you might be making good money at your current job. But what if you dont like it and youre thinking of quitting? And what if your future job doesnt pay as well and you therefore have less monthly income? Are you going to feel comfortable continuing to pay the same amount each month?
Moreover, how is the health of your parents or your spouses parents? Are there medical bills down the road youre going to have to contend with? Are you thinking of starting or adding to your family?
Basically, you need to be honest with yourself about your personal expenses. How do you like to spend your money? Relatively small things add up and can put a dent in your monthly budget.
You also have to consider how youre going to decorate the house. Can you afford to furnish every room once you own them? And what do you expect your utility bills to be? What if the stove breaks in six months? Will you have the savings to get it repaired quickly? And speaking of savings, hows that situation going, or going to change in the months and years ahead? Are you currently trying to stow away lots of money for the future? If so, thats another issue you need to consider.
How Big A Mortgage Can I Get
Use this calculator to determine how much you could borrow for your mortgage. Intended as a guide only, other costs will likely be involved.
Note that since the financial crisis most mortgage providers require a minimum 10% deposit. For the most competitive rates a deposit of 20% is usually required, making it extremely difficult for first home buyers to access the best mortgage rates.
2. monthly payments on car loans, personal loans and credit card debt.
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If I Make $50k A Year How Much House Can I Afford
A person who makes $50,000 a year might be able to afford a house worth anywhere from $180,000 to nearly $300,000.
Thats because salary isnt the only variable that determines your home buying budget. You also have to consider your credit score, current debts, mortgage rates, and many other factors.
Just to show you how much these different variables can affect your home buying power, take a look at a few examples below.
How Does Your Debt
An important metric that your bank uses to calculate the amount of money you can borrow is the DTI ratio comparing your total monthly debts to your monthly pre-tax income.
Depending on your , you may be qualified at a higher ratio, but generally, housing expenses shouldnt exceed 28% of your monthly income.
For example, if your monthly mortgage payment, with taxes and insurance, is $1,260 a month and you have a monthly income of $4,500 before taxes, your DTI is 28%.
You can also reverse the process to find what your housing budget should be by multiplying your income by 0.28. In the above example, that would allow a mortgage payment of $1,260 to achieve a 28% DTI.
Also Check: How Much Net Income Should Go To Mortgage
Reasons #4 And #: Your Mortgage Interest Is Tax
These two points are related, and together they offer you important benefits to carrying a mortgage.
The interest you pay on loans to buy, build or substantially improve a qualified residence is tax-deductible if you itemize your deductions. The deduction is taken at your top tax bracket. Thus, if youre in the 35% tax bracket, every dollar you pay in mortgage interest saves you 35 cents in federal income taxes. You save on state income taxes too.
Say youre in the 32% tax bracket and you get a 3% mortgage. That loan costs you 2.04% after taxes. Meanwhile, say you invest money and earn 3%. Your profits are taxed at only 15%, meaning your after-tax profit is 2.55%. Thus, even if your investments earn no more than what you pay for your loan, youre still making a profit!
Whats Behind The Numbers
NerdWallets Mortgage Income Calculator shows you how much income you need to qualify for a mortgage. It uses five numbers – home price, down payment, loan term, interest rate and your total debt payments – to deliver an estimate of the salary you need to buy your home. After those first five inputs, you can answer optional questions to refine your result.
Also Check: What Is A 30 Year Fixed Jumbo Mortgage Rate
How Can I Maximise The Mortgage I Can Borrow
You cant suddenly acquire an engineering degree .
But you can make yourself eligible for borrowing from the widest range of lenders possible giving yourself access to the best mortgage deals you could get by prepping your mortgage application and grooming your credit rating.
At least a year before you want to start applying for a mortgage you should start taking action which will improve your “qualification” for a mortgage:
1 Push for an improvement in your employment status
- A transfer from fixed-term or temporary contract to permanent contract
- A pay rise
will both significantly improve your mortgage eligibility.
Most private-sector employers respond to pay increase requests from employees rather than proactively reviewing salaries. If youve been with your employer for at least a year, and can provide evidence of your effectiveness, this is a reasonable request that you cant be penalised for.
2 Prep your mortgage application
Start to assemble all the documentation you will need. This will highlight any changes you need to make to improve your mortgageability:
- Look at the recurring payments on your bank accounts
- Multiple store credit card accounts, and regular payments to bookmakers, can be a red flag
Documents you need for your mortgage application:
Make Yourself A Competitive Buyer
Don’t spend all your time daydreaming about listings you find on Zillow. Do research to learn what kinds of mortgage loans are out there, including FHA, conventional, VA and USDA loan programs. Get pre-approved by a lender before you start shopping, so you know your price range, and you’ll be ready to make an offer on the spot if need be.
It’s also important to know your credit score. Having a score of 760 or higher will qualify you for the best mortgage rates, so take a few months and build your credit if you can. And then do everything you can to keep it in good standing.
If you’re not sure where your credit score currently stands, sign up for a free or paid to check your score.
is a free credit monitoring service that anyone regardless of whether they are Capital One cardholder can use. Receive an updated VantageScore credit score from TransUnion every week and credit report updates from TransUnion and Experian in real time. Use the credit score simulator to check the potential effect that certain actions, such as paying off debt or closing a credit card, may have on your credit score. In the months leading up to applying for your mortgage, you’ll want to be extra careful about closing accounts and racking up debt, as it can decrease your score and make your mortgage more expensive.
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That Makes Sense I Think My Credit Score Is In Good Shape Thankfully Is There Anything Else That Happens Before I Get The Mortgage
As far as the lenders work goes, not really. When determining the answer to How much mortgage can I afford?, the lender can tell you what theyre willing to give you, but it is very important that you take stock of your current situation and assess your future before committing to a loan. In other words, were back to the question of what size debt are you comfortable taking on.
How Much Can I Borrow If Im Self
This will vary between lenders. When using our calculator, aim to get as close to what you think your monthly salary would be.
Some lenders will expect to see at least three years worth of accounts. If youve got an accountant, then your accountant should be able to provide you with the necessary paperwork. If not, youll need to provide a solid record of your accounts yourself.
If youre self-employed, it could be helpful to use a mortgage broker. A broker will be familiar with what evidence lenders need in terms of business accounts, tax returns and the number of tax years youll need documentation for.
Brokers are also likely to have insights into what kind of calculations mortgage providers make, when considering the maximum mortgage theyll lend, and who is more willing to lend to self-employed people. Some lenders calculate the amount you can borrow based on several years income. Others base it on your previous year of trading.
Get more information about mortgages and the self-employed.
Reason #: Mortgage Payments Get Easier Over Time
Carrying a mortgage actually gets to be fun. Yes, fun. My father used to love to talk about his mortgage all $98 per month of it. You see, he and my mom bought their home in 1959 for the whopping price of $19,500! Yet, my dad used to tell how his father thought he was crazy. How in the world was my father going to be able to handle such a huge mortgage payment, Grandpop Max asked. After all, my father was earning less than $3,000 a year back then. To spend $1,200 a year on mortgage payments Grandpop Max thought my dad was nuts!
Of course, by the 1970s, Dad was laughing about it. Why? Because his monthly payment in 1974 was identical to what he was paying back in 1959. Yet, Dads income had risen steadily. Thus, his mortgage payment had become insignificant when compared to his income not to mention the fact that his house had grown substantially in value.
You probably remember struggling to make your mortgage payment when it was new. But over time, that payment becomes cheaper relative to your income especially if yours is a fixed-rate loan. Payments on such loans will never rise, but incomes usually do.
What Factors Impact The Amount You Can Borrow
Lenders consider several factors in determining the amount you qualify for, including:
Your debt-to-income ratio. Our How much can I borrow calculator? depends on an accurate input of your income and recurring debt. Youll want to really hone those figures down to a fine point, because lenders will be using them too.
Your loan-to-value ratio. This ratio is a function of the amount of money you put down. If you want to drill down on this calculation, use NerdWallets loan-to-value calculator.
Your credit score. This number impacts the pricing of your loan, more than how much youll qualify for. But thats really important. If you dont know your score, get it here.
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How To Improve Your Credit Rating
- Having a balance too close to your limit can decrease your credit score. Keeping your overall usage low by paying down your balance even if its only the minimum amount.
- Carrying high credit card balances can decrease your credit score. Keeping your balances low by paying down or consolidating your credit cards will improve your credit score.
- Making at least the minimum payment on time is important to maintain or improve your credit score. It’s a good idea to set up automatic payments to make sure you are never late.
- Maintain a mix of credit, such as a credit cards, an auto loan, and a line of credit. Responsible use of credit cards and loans will produce a better credit rating than no history at all.
Using Our Mortgage Calculator
Our mortgage calculator can help you determine how much you might be able to borrow based on your salary. Just input your annual income and guaranteed overtime together with that of the second applicant, if youre applying for a joint mortgage and youll be shown the minimum and maximum you may be offered. Remember though that income isnt the only factor lenders will take into account when determining how much youll be able to borrow, so this should purely be used as a guide.
Once you have an idea of the maximum amount youll be able to borrow, you can start to compare different mortgages Our mortgage charts allow you to search for a mortgage based on your circumstances, giving an overview of the products available and helping you narrow down the options. You may want to speak to an independent broker for a more personalised look at the products available, too.
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