Consider The Ongoing Costs
Now you own your home. You love it. You never want to leave it, and then the roof begins to leak. When youre deciding how much home you can afford, dont forget about ongoing repairs and maintenance.
A good rule of thumb is to set aside at least 1% of your homes value every year for repairs and maintenance. So, to keep a $250,000 home in great shape, that means you should plan to save $2,500 per year.
Also keep in mind that prices for everything tend to go up, not down. Property taxes, homeowners insurance and utilities these are expenses that will continue as long as you own your home.
How To Determine How Much House You Can Afford
Your housing budget will be determined partly by the terms of your mortgage, so in addition to doing an accurate calculation of your existing expenses, its important to get an accurate picture of your loan terms and shop around to different lenders to find the best offer.
Mortgage interest rates are near all-time lows right now, which has made borrowing easier for many buyers. Unfortunately those low rates, coupled with limited available listings, have pushed prices up to record highs. But, if your budget works out, it can still be a great time to buy. Here are some of the factors that can affect your loan terms, which in turn will affect how much you can borrow.
Lenders tend to give the lowest rates to borrowers with the highest credit scores, lowest debt and substantial down payments.
What To Do If A Lender Refuses Your Mortgage Application
A lender could refuse you for a mortgage even if youve been preapproved.
Before a lender approves your loan, theyll verify that the property you want meets certain standards. These standards will vary from lender to lender.
Each lender sets their own lending guidelines and policies. A lender may refuse to grant you a mortgage if you have a poor credit history. There may be other reasons. If you dont get a mortgage, ask your lender about other options available to you.
Other options may include:
- approving you for a lower mortgage amount
- charging you a higher interest rate on the mortgage
- requiring that you provide a larger down payment
- requiring that someone co-sign with you on the mortgage
Also Check: Can You Get Preapproved For A Mortgage Without Hurting Your Credit
Factor In All Homeownership Expenses
Buying a home leads to a cascade of other expenses. Taxes, insurance, utilities and general upkeep will all need to be factored into your budget.
And dont forget moving-in expenses such as furniture, paint and decor, as well as home or yard maintenance tools such as a lawn mower or vacuum cleaner.
When youre thinking about how much home you can afford, remember to consider these expenses in addition to your expected mortgage payment.
And just to be safe, its good to have an emergency fund tucked away should you ever need it.
Pay Down Some Of Your Existing Debt
The minimum payment on your credit accounts determines your debttoincome ratio. By paying down your credit card debt or eliminating a car payment, you can qualify for a bigger home loan.
For example, in the scenario above, reducing your monthly obligations by $200 could increase your maximum price from $234,000 to $270,600.
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Two Types Of Conventional Loans
- Conforming Conventional Loans: Conventional mortgages follow assigned loan limits established by the Federal Housing Finance Agency . In 2022, the maximum conforming limit for a single-unit home in the U.S. continental baseline is $647,200. If this is the maximum conforming limit in your area, and your loan is worth $600,000, your mortgage can be sold into the secondary market as a conventional loan. We publish maximum conforming limits by county across the country.
- Non-conforming Conventional Loans: Also called jumbo loans, non-conforming conventional mortgages exceed the assigned conforming loan limits set by the FHFA. These loans are used by high-income buyers to purchase expensive property in high-cost locations. The conforming loan limit for high-cost areas are 50% higher than the baseline limit, which is $970,800 for single-unit homes as of 2021. Jumbo mortgages have stricter qualifying standards than conventional loans because larger loans exact higher risk for lenders.
PMI on Conventional Loans
Private mortgage insurance or PMI is required for conventional mortgages when your down payment is less than 20% of the homes value. This is an added fee that protects your lender if you fail to pay back your loan. PMI is typically rolled into your monthly payments, which costs 0.5% to 1% of your loan per year. Its only required for a limited time, which is canceled as soon as your mortgage balance reaches 78%.
The Mortgage Qualifying Calculator Says I Cant Afford My Dream Home What Can I Do
It can be disappointing to learn that the home you have set your heart on is out of financial reach, but dont give up hope! It may be that you can reach your goal by adjusting some of your other constraints. Perhaps you can save for a little longer in order to amass a larger down payment, or wait until your credit card and loans are paid off.
These small but significant changes could make all the difference and enable you to get the mortgage you require. If the down payment is causing you an issue, you might consider an FHA loan, which offers competitive rates while requiring only 3.5 percent down, even for borrowers with imperfect credit.
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How To Estimate Affordability
There is a rule of thumb about how much you can afford, based on the calculations your mortgage provider will make. The rule of thumb is you can afford a mortgage where your monthly housing costs are no more than 32% of your gross household income, and where your total debt load is no more than 40% of your gross houshold income. This rule is based on your debt service ratios.
Lenders look at two ratios when determining the mortgage amount you qualify for, which generally indicate how much you can afford. These ratios are called the Gross Debt Service ratio and Total Debt Service ratio. They take into account your income, monthly housing costs, and overall debt load.
The first affordability guideline, as set out by the Canada Mortgage and Housing Corporation , is that your monthly housing costs â mortgage principal and interest, taxes, and heating expenses – should not exceed 32% of your gross household monthly income. For condominiums, P.I.T.H. also includes half of your monthly condominium fees. The sum of these housing costs as a percentage of your gross monthly income is your GDS ratio.
Gross Debt Service Ratio
Understanding The Difference Between Qualifying And Affording
All of these guidelines are extremely helpful in determining an estimate for the maximum monthly mortgage payment that you can afford. However, since these are all estimates, you should keep room for any variation that occurs even after all the steps are followed. Remember that you can never get a single exact figure for the maximum mortgage payment and therefore should always be prepared if you have to pay slightly less than what you expected.
Read Also: Does Prequalifying For A Mortgage Affect Your Credit
When Do Consumers Choose An Arm
Adjustable-rate mortgages , on the other hand, have interest rates that change depending on market conditions. ARMs usually start with a low introductory rate or teaser period, after which the rate changes annually for the remaining term.
ARMs come in 30-year terms that can be taken as a straight adjustable-rate mortgage with rates that change annually right after the first year. However, borrowers usually take them as a hybrid ARM, which come in 3/1, 5/1, 7/1, and 10/1 terms. For example, if you get a 5/1 ARM, your rate remains fixed for the first 5 years of the loan. After the 5-year introductory period, your rate adjusts every year for the rest of the payment term.
When does taking an ARM make sense? ARMs are usually chosen by consumers who plan to sell their house in a few years or refinance their loan. If you need to move every couple of years because of your career, this type of loan might work for you. ARMs usually have a low introductory rate which allows you to make affordable monthly payments, at least during the teaser period. Before this period ends, you can sell your home, allowing you to avoid higher monthly payments once market rates start to increase.
How Much Can I Borrow
We calculate this based on a simple income multiple, but, in reality, itâs much more complex.
When you apply for a mortgage, lenders calculate how much theyâll lend based on both your income and your outgoings â so the more youâre committed to spend each month, the less you can borrow.
This calculator provides useful guidance, but it should be seen as giving a rule-of-thumb result only. Read more about what lenders look at in the How Much Can I Borrow? guide
Your Results
IMPORTANT! Please read…
This information is computer-generated and relies on certain assumptions. It has only been designed to give a useful general indication of costs.
It’s important you always get a specific quote from the lender and double-check the price yourself before acting on the information. We cannot accept responsibility for any errors .
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MoneySavingExpert.com is part of the MoneySupermarket Group, but is entirely editorially independent. Its stance of putting consumers first is protected and enshrined in the legally-bindingMSE Editorial Code.
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How Much Mortgage Can I Qualify For
Lenders have apre-qualification processthat takes your finances into account to determine how much they are willing to lend you. Once the lender has completed a preliminary review, they generally provide a pre-qualification letter that states how much mortgage you qualify for. Get pre-qualified by a lender toconfirm your affordability.
Future Changes That Might Make An Impact
The lender will assess whether youd be able to pay your mortgage if:
- interest rates increased
- you or your partner lost their job
- you couldnt work because of illness
- your life changed, such as having a baby or a career break.
Its important that you also think ahead and plan how youd meet your payments.
For example, you can help to protect yourself against unexpected drops in income by building up savings when you can.
Try to make sure it contains enough for three months outgoings, including your mortgage payments.
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Where Do You Want To Live
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How much mortgage can I afford?
The first step in searching for your home is understanding how large of a mortgage you can afford. With a few inputs, you can determine how much mortgage you may be comfortable with and the potential price range of your future home. Knowing your total household income, how much youâve saved for a down payment, and your monthly expenses , plus new expenses youâd take on , you can get a reasonable estimate. Learn more about factors that can affect your mortgage affordability.
How to estimate affordability
To estimate mortgage affordability, lenders will use two standard debt service ratios: Gross Debt Service and Total Debt Service . According to the Canadian Mortgage and Housing Corporation¹Note 1:
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– GDS is the percentage of your monthly household income that covers your housing costs . It should be at or under 35% of your pre-tax household income.
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– TDS is the percentage of your monthly household income that covers your housing costs and any other debts . It should be at or under 42% of your pre-tax income.
How your down payment affects affordability
The amount you have saved for a down payment is also another important piece of information to help determine affordability. Depending on the purchase price of a home, there are minimum amounts required for your down payment²Note 2:
Step 2 of 6
If I Have 20% Down Or More Is The Qualifying Criteria The Same
When you have 20% down, the mortgage no longer requires default insurance by one of the three Canadian default insurers. After January of 2017, the government changes to default insurance and qualifying criteria changed the playing field for lenders.
For some smaller lenders, it’s more expensive to lend to a client with 20% down as compared to a client with less down. These lenders therefore protect themselves by increasing their requirements and will make the qualification criteria more strict than for insured mortgages. For example, you would see max GDS ratios of 32% and TDS ratios of 40% here.
When clients have 35% down or more, the playing field evens out.
For other lenders with more cash on hand, they can be a little flexible with the 39% and 44% but they don’t want to get too far away from these ratios as there is more risk of default the higher these calculated numbers are.
Lenders in the alternate lending space will allow higher TDS numbers. The reason they allow higher numbers is that they can take a little more common sense view of a client’s income.
For most of the big banks, trust companies, etc., income verification is quite strict. Documented, verified income is all that can be used to qualify an applicant. These lenders don’t include income from room mates, or non-guaranteed second jobs or other short term incomes unless there is a 2 year average that has been declared to CRA.
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How To Calculate Affordability
Zillow’s affordability calculator allows you to customize your payment details, while also providing helpful suggestions in each field to get you started. You can calculate affordability based on your annual income, monthly debts and down payment, or based on your estimated monthly payments and down payment amount.
Our calculator also includes advanced filters to help you get a more accurate estimate of your house affordability, including specific amounts of property taxes, homeowner’s insurance and HOA dues . Learn more about the line items in our calculator to determine your ideal housing budget.
How Much Deposit Do I Need For A Mortgage
In an ideal world, as much as possible. This means youll need to borrow less, so youre likely to pay less interest overall. To see what kind of impact having a larger or smaller amount of deposit could make to you, simply use the sliders on the deposit amount in section 2 How much will I pay?
Youll see the monthly amount you need to pay going up or down according to the size of potential deposit.
This is because one of the most important things for mortgage lenders to consider is the loan to value ratio the amount youre borrowing compared to the overall cost of the property. Often, the lower the LTV, the lower the rate of interest you might be charged. The higher it is, the riskier it is for a lender as they might not get all their money back if they had to sell the property, should you default on the loan.
Some lenders will have different rates for 100% mortgages, 95% mortgages, 90%, 85%, 80% mortgages and so on. Being able to move down to a lower band could save you money over time. Its worth checking to see if increasing your deposit, even by a few thousand pounds to help you switch to a different band, could positively impact your monthly payments.
Also remember that your deposit isnt the only factor that lenders consider when deciding what rate to offer you.
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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.
