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Dont Forget To Factor In Closing Costs

How to pay off a 30 year home mortgage in 5-7 years (2022)

Alright, dont freak out here. But a down payment isnt the only cash youll need to save up to buy a home. There are also closing costs to consider.

On average, closing costs are about 34% of the purchase price of your home.1 Your lender and real estate agent buddies will let you know exactly how much your closing costs are so you can pay for them on closing day.

These costs cover important parts of the home-buying process, such as:

  • Appraisal fees
  • Attorneys
  • Home insurance

Dont forget to factor your closing costs into your overall home-buying budget. For example, if youre purchasing a $200,000 home, multiply that by 4% and youll get an estimated closing cost of $8,000. Add that amount to your 20% down payment , and the total cash youll need to purchase your home is $48,000.

If you dont have the additional $8,000 for closing costs, youll either need to hold off on your home purchase until youve saved up the extra cash or youll have to shoot a little lower on your home price range.

Whatever you do, dont let the closing costs keep you from making the biggest down payment possible. The bigger the down payment, the less youll owe on your mortgage!

How Much Should My Mortgage Be In The Real World

All this math can come across as a bit theoretical. And your goal when deciding on your mortgage amount should be more practical. You want a home loan that will fit neatly within your lifestyle, needs, and ambitions.

Try running a few numbers through a home affordability calculator to begin getting a sense of how much your mortgage should be.

The fact that a lender will give you $x amount because of your DTI, credit score, down payment, and personal finances doesnt necessarily mean you should borrow $x amount.

Yes, most of us borrow up to the maximum were allowed. But that doesnt mean you should.

Save For A 20% Down Payment

You dont need to pay for private mortgage insurance when you put 20% down on your loan. PMI can add quite a bit of money to your monthly payment, so avoiding it can significantly reduce what you pay each month. You may also be able to avoid paying for mortgage insurance if you qualify for a VA loan and pay the funding fee upfront .

Also Check: What Determines The Interest Rate On A Mortgage

Why You Can Trust Bankrate

Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. Weve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next.

Bankrate follows a strict editorial policy, so you can trust that were putting your interests first. All of our content is authored by highly qualified professionals and edited by subject matter experts, who ensure everything we publish is objective, accurate and trustworthy.

Our mortgage reporters and editors focus on the points consumers care about most the latest rates, the best lenders, navigating the homebuying process, refinancing your mortgage and more so you can feel confident when you make decisions as a homebuyer and a homeowner.

How Much House Can I Afford With A Usda Loan

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USDA loans for qualifying rural areas are much more flexible than regular loans. They dont require a down payment and can include the mortgage insurance fee in the loan. This means you can actually finance 102% of the value of the house and avoid paying this fee upfront.

Keep in mind, however, that there are parameters for income eligibility and for the price and size of the house itself. Even if you can afford a certain amount, the eligibility might be for a less expensive home.

In order to see these requirements in detail, you can go to the USDA website and look at the qualifying areas and income by county.

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How Much Can You Spend On A Mortgage

Rather than looking at the total amount of money you can borrow for a house, it’s better to look at how affordable your monthly payment might be. That’s because this is what you’ll be paying each month, so you want to make sure it fits into your budget.

One of the best ways to measure that is the “debt-to-income” or DTI ratio. It’s broadly calculated by dividing your debt payments by your income. More specifically, it can be measured in two ways:

  • Front-end DTI ratio: This measures your monthly mortgage payment as a percentage of your total gross monthly income. For example, if your salary is $54,000 per year and your mortgage payment is $1,000, then your front-end DTI ratio is 22% .
  • Back-end DTI ratio: This measures your total monthly debt payments, including your mortgage, as a percentage of your total gross monthly income. If you also pay $250 per month for student loans and $200 per month for your credit cards, for example, your back-end DTI ratio would be 33% .

Lenders use these ratios to figure out the maximum monthly mortgage payment you might qualify for. For example, Freddie Mac and Fannie Mae guidelines state that for a conventional mortgage, your back-end DTI ratio shouldn’t exceed 36%. In other words, your debt payments combined shouldn’t be more than 36% of your before-tax income each month.

Lenders look at other factors when deciding whether to approve you for a mortgage too, such as your and how stable your job is.

How Much Of My Income Should Go Towards A Mortgage Payment

Most people dream of owning a home, whether its a small one in the city or a rural one with a huge property. However, affording a home is difficult and saving up enough money can be challenging. Obtaining a mortgage is a big step, and you likely have many questions. One important thing you will need to know is how much of a mortgage you can afford based on your income. You can use a few different guidelines to discover what percent of your net income should go toward mortgage payments each month.

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How Much House Can I Afford

12 Min Read | Jun 27, 2022

To feel confident about buying a house you can afford, enter your monthly income into our calculator and instantly get a list of home prices that fit your budget.

As you can see from our calculator, how much house you can afford really depends on the relationship between your income and mortgage.

To figure out how much mortgage you can afford with your income, different lenders use different guidelinesbut most lenders dish out mortgages that are way too expensive and keep borrowers in debt for decades!

We want to help you buy a home thats a blessing, not a burden. And the only way to do that is to calculate your home-buying budget the smart wayand stick to it!

Thats what our calculator does for you. How does it work? Well show youget ready for some math!

The Traditional Model: 35%/45% Of Pretax Income

BMO | How much home can you really afford?

In an article on how the mortgage crash of the late 2000s changed the rules for first-time home buyers, the New York Times reported:

If youre determined to be truly conservative, dont spend more than about 35% of your pretax income on mortgage, property tax, and home insurance payments. Bank of America, which adheres to the guidelines that Fannie Mae and Freddie Mac set, will let your total debt hit 45% of your pretax income, but no more.

Lets remember that even in the post-crisis lending world, mortgage lenders want to approve creditworthy borrowers for the largest mortgage possible. I wouldnt call 35% of your pretax income on mortgage, property tax, and home insurance payments conservative. Id call it average.

Read Also: What Lender Has The Lowest Mortgage Rates

How To Calculate Your Dti

We talked a lot about debt-to-income ratios in this article. Knowing yours is key to learning how much house you can afford.

So, in case you were wondering, heres how you can calculate your own DTI ratio for mortgage qualifying.

  • First, add up all the monthly expenses included in your DTI:
  • Estimated monthly housing expenses
  • Minimum credit card payments
  • Obligations like alimony and child support

Next, you need to know your gross monthly income.

Remember, thats the highest figure on your pay stub, before deductions for tax and so on. If your income varies considerably perhaps seasonally use an average over the last year or two.

Now, divide the first figure by the second .

Federal regulator the Consumer Financial Protection Bureau gives an example:

If you pay $1,500 a month for your mortgage and another $100 a month for an auto loan and $400 a month for the rest of your debts, your monthly debt payments are $2,000.

If your gross monthly income is $6,000, then your debt-to-income ratio is 33 percent.

If you use a calculator, youll need to multiply the result by 100 to get a percentage. So your display says 0.3333 but your DTI is 33.33% .

How To Calculate A Down Payment

The down payment is the amount that the buyer can afford to pay out-of-pocket for the residence, using cash or liquid assets. Lenders typically demand a down payment of at least 20% of a homes purchase price, but many let buyers purchase a home with significantly smaller percentages. Obviously, the more you can put down, the less financing youll need, and the better you look to the bank.

For example, if a prospective homebuyer can afford to pay 10% on a $100,000 home, the down payment is $10,000, which means the homeowner must finance $90,000.

Besides the amount of financing, lenders also want to know the number of years for which the mortgage loan is needed. A short-term mortgage has higher monthly payments but is likely less expensive over the duration of the loan.

Homebuyers need to come up with a 20% down payment to avoid paying private mortgage insurance.

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What Factors Help Determine ‘how Much House Can I Afford’

Key factors in calculating affordability are 1) your monthly income 2) cash reserves to cover your down payment and closing costs 3) your monthly expenses 4) your credit profile.

  • Income Money that you receive on a regular basis, such as your salary or income from investments. Your income helps establish a baseline for what you can afford to pay every month.

  • Cash reserves This is the amount of money you have available to make a down payment and cover closing costs. You can use your savings, investments or other sources.

  • Debt and expenses Monthly obligations you may have, such as credit cards, car payments, student loans, groceries, utilities, insurance, etc.

  • Credit profile Your credit score and the amount of debt you owe influence a lenders view of you as a borrower. Those factors will help determine how much money you can borrow and the mortgage interest rate youll earn.

How Much House Can I Afford Based On My Salary

Are Home Loans Based On Gross Income

To calculate how much house you can afford, use the 25% rulenever spend more than 25% of your monthly take-home pay on monthly mortgage payments.

That 25% limit includes principal, interest, property taxes, home insurance, private mortgage insurance and dont forget to consider homeowners association fees. Whoathose are a lot of variables!

But dont worry, our full-version mortgage calculator makes it super easy to calculate those numbers so you can preview what your monthly mortgage payment might be.

Recommended Reading: How Accurate Are Mortgage Affordability Calculators

How Much Should You Spend On A Home

Just because a lender will give you a certain loan amount doesnt mean its a smart decision. In fact, borrowing the maximum is often a grave mistake. Whats more, rules of thumb fall short. What DTI ratio might be comfortable for a family earning $250,000 a year might not work for a family earning $75,000 a year, as financial planning guru Michael Kitces has pointed out.

Instead, consider the following factors as you determine whats best for your situation.

Have you accounted for your other financial goals? Here you might consider retirement savings in a 401 or IRA, saving for a childs education, and saving for emergencies.

Are you qualifying for a mortgage based on one or two incomes? If you are using two incomes, do you plan for one spouse to stay home with children at some point? Are both incomes secure, or is there a meaningful risk of losing an income without a ready replacement? If so, the loss of one income should be considered in the decision.

Are you buying a new home or a fixer-upper? If its a fixer-upper, you should consider the costs necessary to renovate the home.

In other words, make sure the proposed mortgage fits in with your lifestyle and other financial goals. Ultimately, remember to ask how much house can you afford while still being able to enjoy the other things in life.

What Other Financial Factors Should I Consider

Theres one more important step in assessing your homebuyer status: considering upfront costs and big-picture finances. Here are some other costs to take into account when determining what kind of house you can afford:

  • Down Payment Its recommended to put down 20% or more of your homes purchase price if possible to lower your payments and avoid private mortgage insurance.
  • Closing Costs and Fees On average, homebuyers will pay around 2% to 3% of their total loan in closing costs. In some instances, there may be extra fees associated with the closing.
  • Comfortable Budgeting The calculations described in this article show what you can comfortably afford, but setting your sights slightly below those numbers may allow for better financial stability.
  • Lifestyle Budgeting If you like to go on a vacation every year or have an expensive hobby, these costs are worth keeping in mind. Dont just budget for your home, but for all the great things life has in store for you.

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Learn About Other Types Of Loans

Most of these guidelines are in relation to conventional loans, but you may qualify for another type of loan. There are a few mortgage programs that allow people with low credit scores or savings to still purchase a home. VA loans and FHA loans have less strict requirements than conventional loans, so its worthwhile to look into them if you dont think you will qualify for a conventional loan.

What Percentage Of Your Income Should Go Towards Your Mortgage

How To Know How Much House You Can Afford

Your salary makes up a big part in determining how much house you can afford. On one hand, you may want to see how much you could afford with your current salary. Or, you may want to figure out how much income you need to afford the house you really want. Either way, this guide will help you determine how much of your income you should put toward your mortgage payments every month.

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What Are Your Spending Priorities

Your home buying process all depends on your lifestyle and priorities. Suppose you love foreign travel or gourmet eating or sailing or shopping. Borrowing the max amount might mean youre sacrificing other luxuries for years to come.

It could be best to settle on a more modest home and a smaller mortgage if that allows you to maintain your current lifestyle.

How Much Mortgage Can I Afford

Generally speaking, most prospective homeowners can afford to finance a property whose mortgage isbetween two and two-and-a-half times their annual gross income. Under this formula, a person earning $100,000 per year can only afford a mortgage of $200,000 to $250,000. However, this calculation is only a general guideline.”

Ultimately, when deciding on a property, you need to consider several additional factors. First, it’s a good idea to have some understanding of what your lender thinks you can afford . Second, you need to have some personal introspection and figure out what type of home you are willing to live in if you plan on living in the house for a long time and what other types of consumption you are ready to forgoor notto live in your home.

While real estate has traditionally been considered a safe long-term investment, recessions and other disasters can test that theoryand make would-be homeowners think twice.

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Tips For Lowering Your Monthly Payment

Theres plenty you can do in the months leading up to a mortgage application to drive down your mortgage rate and thus your monthly payments:

  • Reduce your borrowing. Youve seen how important your DTI is so try to lower your debt burden. Focus first on getting all your credit and store card balances below 30% of their available credit limits.
  • Improve your credit score. Just getting those card balances below that magic 30% should raise your score very quickly. Dont open or close any credit accounts in the run-up to a new application. Most importantly, continue to make every payment on time. And order a free copy of your credit report from to check for mistakes, which are surprisingly common.
  • Start saving for the long term. Once youve reduced your debt, get saving. You may not have time to get together a substantial down payment this time around. But lenders will be impressed by any assets you have and making a bigger down payment than the minimum could buy you a lower mortgage rate. Meanwhile, saving should get you to the time when you can afford 20% sooner.
  • Start off with baby steps. You may not get to be a lenders ideal borrower overnight but most of us can make ourselves a better bet quite quickly.

    Peter Warden Contributor

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