Things That Determine How Much Mortgage You Can Afford
The amount you can borrow for a mortgage depends on how much a lender thinks you can pay back. And that equation isnt just based on your salary theres a whole host of factors lenders consider.
These are the three main pillars mortgage lenders use when deciding how much to lend you:
Each of these factors is roughly as important as the others. And each one will have a big impact on how much mortgage you can afford.
What If I Want To Refinance With My Current Mortgage Lender
If you already own a home and plan on refinancing, you might want to start the search with your existing mortgage lender.
Some lenders offer loyalty discounts to refinance applicants.
Make sure you ask about this before taking your mortgage elsewhere, says Martucci.
These discounts can be especially common when you have substantial funds on deposit with the lender or bank, even if you dont currently have a mortgage loan with them.
Put another way, you may be able to get an ideal rate if you already have a highyield account with a bank offering loyalty discounts.
Ask about a streamline refinance
Homeowners with governmentbacked loans have another good option for refinancing.
Call up your current lender when rates have fallen and ask them to do a streamline refinance. They are likely to accommodate your request if you are a lowrisk borrower, as losing you as a customer can be costly, says Rossi.
Streamline refinancing is a great way to lower your interest rate, as these loans require little documentation and can move through the pipeline more quickly than a traditional refinance.
Dont limit yourself to your current lender
But even if you love your current lender, you should still shop around for the best rate, adds Moon.
In many cases, your current bank may not be the best option for a new home purchase or refinance because they dont specialize in the type of loan you need. Or, their rates may be less competitive.
Monthly Payments For A $100000 Mortgage
When you buy a house, your monthly mortgage payments go toward both your loan balance and other costs, like interest, insurance, and taxes.
Generally speaking, you can expect your monthly payment to cover:
- Principal: This is part of your payment that goes straight toward your loan balance. Due to how loans are amortized, you usually pay less toward your principal at the beginning of your loans life and more at the end of it.
- Interest: Interest is what you pay the lender for borrowing the funds, and youll pay more toward this cost at the start of your loan than at the end of it. Your interest rate will determine how much youll pay here.
- Escrow costs: Escrow accounts are often used to store funds for future home insurance premiums, property taxes, and mortgage insurance. Your servicer will then use that money later when those bills come due.
Assuming principal and interest only, the monthly payment on a $100,000 loan with an of 3% would come out to $421.60 on a 30-year term and $690.58 on a 15-year one.
Credible is here to help with your pre-approval. Answer a few quick questions below to get started.
Heres a breakdown of what the monthly payments principal and interest only would look like on a $100,000 mortgage with varying interest rates:
|Annual Percentage Rate|
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Take A Longer Mortgage Term
The longer your mortgage term, the lower your monthly payment. If you take a longer term, you spread your payments over a larger number of months and years, which reduces the amount youll owe each month. While taking a longer term will increase the amount you pay in interest over time, it can free up more cash to keep your DTI low.
How To Use A How Much Can I Borrow Mortgage Calculator
With this calculator, you can run some what-if scenarios. For example, you may consider:
How long will I live in this home? That can greatly impact your decision on whether to choose a 30-year fixed rate loan or a shorter term. The longer term will provide a more affordable monthly payment, but youll pay a lot more interest over the long term. A 15-year fixed-rate mortgage will cost you way less interest over the life of the loan, but your monthly payment will be considerably more.
Is an adjustable-rate mortgage a better option for me? If you plan on being in this home for just a few years, a 5/1 ARM could be a good option. Youll enjoy a lower initial interest rate thats fixed for five years, but the rate changes annually after that.
Am I trying to buy too much house? Sure, lenders may be more than happy to put your name on a big loan, but how do you feel about it? Are you comfortable with how it may impact your monthly budget, or are you feeling a bit stretched? Consider how your new home costs may impact your other spending goals, such as travel and savings.
How much of a down payment should I make? Its always the big question. Are you putting down as little as possible and having to make up for it with larger monthly payments and possibly having to pay mortgage insurance?
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What Is The Maximum Mortgage Calculator
Our maximum mortgage calculator helps you calculate the maximum monthly mortgage payment and total mortgage amount you can afford. The calculator also helps you determine the effects of different interest rates and levels of personal income on how much mortgage you can afford. This calculator is for you if you are reviewing your financial stability as you get ready to purchase a property.
How Can I Qualify To Borrow More
If youre disappointed by the how much can I borrow results, remember that there are many factors at work. Small improvements in one or more can make a substantial difference:
A bigger down payment always helps. The more money you put down, the better youll look in the eyes of the lender.
Be a tactical buyer. If school districts wont play a role in your family for years, consider finding a home in a transitioning neighborhood maybe buying a starter home rather than a forever home. Youll likely get a better home value and wont need to borrow as much.
Reduce debt even a little. Paying off or down a credit card or two can help in several ways. Your debt-to-income ratio will go down and you may even get a nice bump in your credit score.
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Summary: Deciding How Much House You Can Afford
Ultimately, how much home you can afford depends on your financial situation and preferences. It requires a more comprehensive decision than just how much money you want to spend on mortgage payments each month.
Evaluate your full financial situation, your ability to pay off a mortgage and where you need to save for other things.
Once youve done all that, its time to go after that perfect home. Get started with Rocket Mortgage®.
Get approved to buy a home.
Rocket Mortgage® lets you get to house hunting sooner.
How Lenders Determine How Much House You Can Afford
Youre finally ready to get out of the rental market and buy a home of your own. But how do you know how much house you can afford?
Before you head out on your house-hunting adventure, you can easily do those affordability calculations yourself before you officially begin shopping for a mortgage.
Here are the top factors lenders typically consider when determining how much house you can afford.
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What A How Much Can I Borrow Calculator Does
The NerdWallet How much can I borrow? mortgage calculator utilizes an easy step-by-step process:
To begin, input:
Your annual income
The mortgage term youll be seeking
Your monthly recurring debt
If you dont know how much your recurring debt payments add up to in a month, click the No. Help me! button. Well walk you through typical debts, like car loans and student debt.
At this point, well estimate your property taxes and insurance. You can also adjust those numbers if you have specific estimates.
Enter monthly HOA dues if you know what theyll be. If not, you can always come back to this later.
Now, your results will appear, including:
An estimate of the maximum mortgage amount that NerdWallet recommends
A ballpark of your monthly mortgage payment
The maximum amount a lender might qualify you for
And how much your monthly mortgage payment might be for that amount
Early Repayment And Extra Payments
In many situations, mortgage borrowers may want to pay off mortgages earlier rather than later, either in whole or in part, for reasons including but not limited to interest savings, wanting to sell their home, or refinancing. Our calculator can factor in monthly, annual, or one-time extra payments. However, borrowers need to understand the advantages and disadvantages of paying ahead on the mortgage.
Early Repayment Strategies
Aside from paying off the mortgage loan entirely, typically, there are three main strategies that can be used to repay a mortgage loan earlier. Borrowers mainly adopt these strategies to save on interest. These methods can be used in combination or individually.
Reasons for early repayment
Making extra payments offers the following advantages:
Drawbacks of early repayment
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How To Lock In The Lowest Mortgage Rates In History
Before applying for a mortgage, we suggest you follow these steps:
What Is My Mortgage
If you have more debt, you might struggle to keep your DTI low while also paying off a mortgage. In this case, it can be useful to work backward before you decide on a percentage of income for your mortgage payment.
Multiply your monthly gross income by .43 to determine how much money you can spend each month to keep your DTI ratio at 43%. Youll then subtract all of your recurring, fixed monthly debt obligations and minimum payments on credit cards and other lines of credit. The dollar amount you have left after subtracting all of your debts lets you know how much you can afford to spend each month on your mortgage.
Lets take a look at an example. Imagine that your household brings in $5,000 in gross monthly income. Your recurring debts are as follows:
- Rent: $500
- Minimum student loan payment: $250
- Minimum credit card payment: $200
- Minimum auto loan payment: $200
- Homeowners association fees: $100
In this example, your total monthly debt obligation is $1,250.With quick math, we find that 43% of your gross income is $2,150, and your recurring debts take up 25% of your gross income. This means that if you want to keep your DTI ratio at 43%, you should spend no more than 18% of your gross income on your monthly payment. Use a mortgage calculator and your estimated monthly payment to calculate how much money you can borrow and stay on budget.
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What Does This Possibly Mean For Me
Based on your income, expenses, and the loan you selected, the amount above represents the most you will likely be comfortably able to pay for a home. This assumes that your total costs for your loan payments , taxes, and insurance should not be higher than 45% of your monthly income. Also, remember that you’ll have additional homeownership costs that you may need to factor into your monthly budget, including insurance, association fees, and maintenance expenses.Mortgage insurance expenseswhich you may have to pay if your down payment is less than 20%are not included in this calculation. We suggest that all buyers get pre-qualified or pre-approved prior to starting their new home search.
You selected an adjustable rate mortgage or ARM. Based on your income, expenses, and the loan you selected, the amount above represents the most you can comfortably afford to pay for a home*. This assumes that your total costs for your loan payments , taxes, and insurance should not be higher than 45%. Also, remember that you’ll have additional homeownership costs that you may need to factor into your monthly budget, including insurance, association fees, and maintenance expenses. Mortgage insurance expenseswhich you may have to pay if your downpayment is less than 20%are not included in this calculation. We suggest that for all buyers to get pre-qualified prior to starting their new home search.
How Do You Check Your Credit Score
If you dont want to spend the money on a detailed credit report, you can also check it for free using RateHub.cas free credit score tool. Once you know your credit score, youll have a clearer idea of whether youll qualify for a traditional mortgage, or whether youll need to apply for a bad credit mortgage.
Its important to note that the credit score you receive might be different from the score that a potential lender will pull on your behalf. Every credit agency uses a different calculation to work out your credit score, and lenders sometimes use agencies that arent available to consumers. Fortunately, the differences tend to be minor.
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Show The Seller Youre Making A Serious Offer
Youve probably heard of earnest money, but maybe you arent quite sure what it is. Think of it as your security deposit.
Earnest money tells the seller youre serious about buying their home. If you follow through with the contract, the money will be applied to your purchase. If you break the terms of the contract, you risk forfeiting the money to the seller.
There is no minimum requirement for earnest money. Youll negotiate an amount with the seller. Then, within a few days of the seller accepting your offer, youll deposit the earnest money into an escrow account.
What Else Do Lenders Look At When You Apply
As we mentioned, your credit score is not the only factor lenders examine before they approve or decline your application. They also want to see a favourable history of debt management on your part. This means that on top of your credit score, lenders are also going to pull a copy of your to examine your payment record. So, even if your credit score is above the 600 mark, if your lender sees that you have a history of debt and payment problems, it may raise some alarms and cause them to reconsider your level of creditworthiness.
Other aspects that your lender might look at include, but arent limited to:
- Your income
- The amount youre planning to borrow
- Your current debts
- The amortization period
This is where the new stress-test will come into play for all potential borrowers. In order to qualify, youll need to prove to your lender that youll be able to afford your mortgage payments in the years to come.
Theyll also calculate your monthly housing costs, also known as your gross debt service ratio, which includes your:
- Potential mortgage payments
- Potential cost of heating and other utilities
- 50% of condominium fees
This will be followed by an examination of your overall debt load, also known as your total debt service ratio, which includes your:
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