How Much Mortgage Can You Afford Rule Of Thumb

Other Considerations To Determine Your Down Payment

Your mortgage payment is just one piece of your overall household budget. With that in mind, here are some other factors to consider when planning for the size of your down payment:

• Keep some savings in the bank. Avoid using your entire savings for a down payment. You could end up “house poor,” spending too much of your income servicing your mortgage.

• Dont forget about closing costs. It’s also important to make sure you have enough cash on hand to cover closing costs, which are usually 2-5% of the home’s purchase price.

• Plan for the ongoing costs of homeownership. Leaving a cushion for home maintenance and repairs, as well as potential emergencies, is a good idea even if you’re purchasing a move-in-ready home. In all, you want to be sure your down payment leaves you with enough room to cover all the costs of buying a house.

• Shop around. Do your research and compare mortgage rates from at least three to five lenders. Dont forget to look into programs offered by lenders and consider down payment assistance options, especially if you’re a first-time home buyer.

The amount of your down payment varies depending on the cost of the home and what percentage of the offer price you’re making as a payment. Using a down payment calculator can help you easily see down payment amounts and how altering your down payment affects your monthly mortgage payment.

Don’t Be Fooled By The 5

Kaplan says homeowners usually need to stay put for at least five years to make the closing costs of buying a home worthwhile. That’s a useful rule of thumb, but if you’re thinking of staying that long, you may be tempted to opt for a mortgage that’s higher than you can comfortably afford now. Be careful. Predicting future income isnt as easy as it may seem. Kaplan cautions that stretching your budget can backfire if you become unemployed for an extended period.

When they’re planning for the long term, many homebuyers may also see their home as an investment for the future, which can be an excuse for spending more today than they can easily afford. But real estate can be volatile, as we saw in the 2008 housing crash. Having too much of your net worth tied up in your home can be risky.

Personal Considerations For Homebuyers

A lender could tell you that you can afford a considerable estate, but can you? Remember, the lenders criteria look primarily at your gross pay and other debts. The problem with using gross income is simple: You are factoring in as much as 30% of your paycheckbut what about taxes, FICA deductions, and health insurance premiums. In addition, consider your pre-tax retirement contributions and college savings, if you have children. Even if you get a refund on your tax return, that doesnt help you nowand how much will you get back?

Thats why some financial experts feel its more realistic to think in terms of your net income and that you shouldnt use any more than 25% of your net income on your mortgage payment. Otherwise, while you might be able to pay the mortgage monthly, you could end up house poor.

The costs of paying for and maintaining your home could take up such a large percentage of your incomefar and above the nominal front-end ratiothat you wont have enough money left to cover other discretionary expenses or outstanding debts or to save for retirement or even a rainy day. Whether or not to be house poor is mostly a matter of personal choice getting approved for a mortgage doesnt mean you can afford the payments.

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Tips To Determine How Much Mortgage You Can Afford

Whats a rule of thumb to determine how much mortgage you can afford? Theres no one rule, but these four tips will tell you.

Home ownership should make you feel safe and secure, and that includes financially. Be sure you can afford your home by calculating how much of a mortgage you can safely fit into your budget.

Why not just take out the biggest mortgage a lender says you can have? Because your lender bases that number on a formula that doesnt consider your current and future financial and personal goals.

Think ahead to major life events and consider how those might influence your budget. Do you want to return to school for an advanced degree? Will a new child add day care to your monthly expenses? Does a relative plan to eventually live with you and contribute to the mortgage? Do you like to travel?

Consider those lifestyle issues as you check out these four methods for estimating the amount of mortgage you can afford.

How To Calculate Your Required Income

To use the Mortgage Income Calculator, fill in these fields:

• Mortgage interest rate.

• Recurring debt payments. Heres where you list all your monthly payments on loans and credit cards. If you dont know your total monthly debts, click No and the calculator will ask you to enter monthly bill amounts for:

• Car loan or lease.

• Minimum credit card payment.

• Personal loan, child support and other regular payments.

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Look Closely At All Your Expenses

You’ve got to put food on the table, clothes on your back and gas in your car â and have a little fun now and then. You also need to be ready for emergencies.

Your mortgage specialist will help you make sure you have money left over to pay for your day-to-day needs, as well as some of your lifestyle choices. Most lenders use the below ratios as guides to figure out the most you should spend on your housing costs and other debts:

If your monthly housing and housing-related costs don’t leave you enough money for your other expenses, you have a few options.

You and your mortgage specialist may also need to think about future expenses. Maybe you’ll need to replace your car within the next year. Or if you’re expecting a baby, child-related costs as well as parental leave may affect your budget.

How Much House Can You Afford If You Make 120000 A Year

Safe debt guidelines So start by doing the math. If you make $50,000 a year, your total yearly housing costs should ideally be no more than $14,000, or $1,167 a month. If you make $120,000 a year, you can go up to $33,600 a year, or $2,800 a monthas long as your other debts don’t push you beyond the 36 percent mark.

Also Check: Can You Refinance A Second Home Mortgage

How Does Where I Live Impact How Much House I Can Afford

Where you live plays a major role in what you can spend on a house. For example, youd be able to buy a much bigger piece of property in St. Louis than you could for the same price in San Francisco. You should also think about the areas overall cost of living. If you live in a town where transportation and utility costs are relatively low, for example, you may be able to carve out some extra room in your budget for housing costs.

What Is A Down Payment

A down payment is the cash you pay upfront to make a large purchase, such as a home. You use a loan to pay the rest of the purchase price over time. Down payments are usually shown as a percentage of the price. A 10% down payment on a $350,000 home would be $35,000.

When applying for a mortgage to buy a house, the down payment is your contribution toward the purchase and represents your initial ownership stake in the home. The mortgage lender provides the rest of the money to buy the property.

Lenders require a down payment for most mortgages. However, some types of loans backed by the federal government may not require down payments.

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Why Start With The Monthly Payment

Loan officers often offer to start by looking at the maximum mortgage amount you could qualify for, based primarily on your credit score and debt-to-income ratio. While it can feel pretty cool to see a big number, maxing out what a lender will offer could leave you house poor. That would mean too much of your income would go toward housing, leaving you scraping to pay your other bills, let alone save for retirement, travel or have fun.

Before you start talking to lenders, you should have a strong sense of your current financial situation. That includes money coming in, money going out and money goals. For example, if you want to start a family or plan to increase your contributions to your 401, include that extra spending even if it’s not part of your current budget. If you’re considering a career change or going back to school down the line, think about how that would affect your household income. Use those numbers to figure out what mortgage payment amount would be comfortable for you.

Check Your Credit Score

Its important that you request your credit report before you start the application process and find out your credit score.

Your is a three-digit summary of your creditworthiness. Borrowers with high credit scores will typically be offered the lowest interest rates, while those with low scores will be offered the most expensive rates.

You can get a free once per year from each of the three major . You may also access your credit report for free under certain conditions, for example, if youre the victim of identity theft.

Additionally, thanks to the CARE Act, you can now access free weekly reports from the three major credit bureaus, at least until April 2022.

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Tips For Buying A Home

In order to help ensure that you can afford your home and maintain it over time, there are some smart measures you can take. First, save up a cash reserve in excess of your down payment and keep it in reserve in case you lose your job or are unable to earn income. Having several months of mortgage payments in emergency savings lets you keep the house while looking for new work.

You should also look for ways to save on your mortgage payments. While a 15-year mortgage will cost you less over the loan’s life, a 30-year mortgage will feature lower monthly payments, which may make it easier to afford month-to-month. Certain loan programs also offer reduced or zero down payment options such as VA loans for veterans or USDA loans for rural properties.

Finally, don’t buy a bigger house than you can afford. Do you really need that extra room or finished basement? Does it need to be in this particular neighborhood? If you are willing to compromise a bit on things like this, you can often score lower home prices.

Benefits Of A Larger Down Payment

Saving enough money for a substantial down payment takes time, so a zero- or low-down-payment requirement may speed up your ability to buy a home. But making a larger down payment has advantages, which include:

• A better mortgage interest rate. Lenders may shave a few fractions of a percentage point off of your interest rate if you make a larger down payment. When you borrow less of the home’s price, there’s less risk for lenders, and they tend to reward this with more favorable terms.

• More equity in your home right away. Your home equity is your home’s value minus the amount you owe on your mortgage. In other words, it’s the extent to which your home is an asset rather than a debt. More equity means more wealth.

• A lower monthly mortgage payment. Borrowing less of your home’s price lowers your principal, which also means you’ll pay less interest over the life of the loan.

• Lower upfront and ongoing fees. Low- or no-down-payment government-backed mortgage programs reduce lenders’ risk by guaranteeing a portion of the loans. If a borrower defaults on one of these loans, the associated government agency will reimburse the lender. In order to offset some of that cost, these loans can come with significant one-time costs, like the VA funding fee, or added ongoing costs like FHA mortgage insurance.

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The Traditional Home Affordability Rules Used

There are many different theories lenders use to determine how much house you can afford. They can result in many different amounts that you can supposedly afford. Here are three of the most common:

• 43% Qualified Mortgage Rule: This rule helps prevent lenders from offering loans borrowers cannot afford. Lenders use the following calculation:

Gross monthly income x 0.43 = Maximum monthly debtsMaximum monthly debts – Monthly non-mortgage debts = Maximum monthly mortgage payment

Real life example with gross monthly income of $5,000 and monthly non-mortgage debts of $450 :

$5,000 x 0.43 = $2,150$2,150 – $450 = $1,700 maximum total monthly mortgage payment

Gross monthly income x 0.28 = Maximum monthly mortgage payment

Real life example with gross monthly income of $5,000:

$5,000 x 0.28 = $1,400 maximum total monthly mortgage payment

Gross monthly income x 0.36 = Maximum total monthly debts, including the mortgage paymentMaximum total monthly debts – Monthly non-mortgage debts = Maximum monthly mortgage payment

Real life example with gross monthly income of $5,000 and monthly non-mortgage debt of $450:

In Conclusion How Much House Can You Afford

To figure out how much house you can afford, get a basic understanding of the different rules of thumb for buying a house. Do some calculations on your own before applying for a home loan and crossing your fingers hoping you qualify for enough to get the house you want. Doing some basic calculations based on your annual income will help you avoid wasting precious time looking at houses you cant afford.

If you feel you do not qualify, work on reducing your debt-to-income ratio so these rules dont disqualify you.

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Other Factors To Consider

The 1% rule of thumb doesnt consider every aspect of a mortgage. It can be worth refinancing a jumbo loan even if the new rate is less than one percentage point under your current rate, said Cohn. Jumbo loans, or non-conforming loans, were loans over $548,250 in 2021, increasing to $647,200 in 2022, and refinancing a larger loan after a 0.5% rate drop could save you a significant amount of money.

Other reasons to refinance may not result in immediate savings. If you have an adjustable rate, you may want to refinance to a fixed rate to benefit from locking the rate in permanently, suggested Cohn. Otherwise, the amount you pay each month will increase or decrease along with the current interest rate, and some mortgages even have a limit on how low your interest rate can go.

Cohn also noted that some people choose to refinance to a shorter term so they can pay the mortgage off faster. You might refinance from a 30-year to a 15-year mortgage. Refinancing can also work if you have a HELOC and want to consolidate the first and second into a new first mortgage, she explained.

When it comes to deciding whether to refinance, Cohn said, Its really a question of how long you think youll remain in your home and how long will it take to actually benefit from the refinancing.

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How Much House Can You Really Afford

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It’s more than tempting to dive right in and start favoriting houses on real estate listing sites, but it’s not worth falling in love or even lust if the property’s way beyond your budget. But how do you determine your price range? You could reach out to mortgage lenders and see what they’d be willing to let you borrow, but you’re likely better off working backward from the monthly mortgage payment. Here’s why.

» MORE: Try NerdWallet’s home affordability calculator

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Signs That You Are Ready To Buy A House

The math of housing affordability is important, but consider the following questions affecting your home ownership decision before committing.

In addition, there are other important, non-financial considerations to work through as well:

• Do you like the location?
• How long will you live in the house?
• Does the house have enough room to support a growing family?

Think through these issues as you’re working with the Mortgage Affordability Calculator to determine if the house you are considering is truly the right fit for your needs both budget and personal.