Bringing It All Together
As you can see, there are a number of factors that determine how large of a mortgage you can get. If you get access to your FICO score and crunch some numbers, you can get a rough idea of your borrowing capacity. You can also seek assistance from your bank or a mortgage broker.
All of this, however, still leaves one important question.
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.
Should I Take The Maximum I Can Borrow
Its wise to only borrow an amount you feel comfortable with, as failing to meet your mortgage payments could result in hefty penalties or even having your home repossessed.
When deciding how much to borrow, it also makes sense to consider how your circumstances might change in the future. For example, starting a family, redundancy, a career break or one less income could affect your ability to cover your mortgage repayments.
Also Check: What Is Apr Vs Mortgage Rate
Number : To Help Pay Off A Mortgage Or Other Debts
If you share the home you own with your partner, children or other loved ones, life insurance can help pay off the balance of your mortgage in the event of your death. This may make it possible for your spouse or family to stay in their current home despite the loss of your incomesomething thats important to a lot of parents.
Life insurance can also help pay off outstanding loans, lines of credit or other consumer debt, as well as funeral costs and burial expenses. Ideally, your policys death benefit will be large enough for your family to maintain their current lifestyle without your income.
Use A Home Affordability Calculator
To get a quick answer to how much house you can afford, you can use a home affordability calculator. NerdWallets calculator uses the 28/36 rule as a baseline. That means an “affordable” monthly mortgage payment would be no more than 28% of your gross income, and no more than 36% of your gross income goes toward debts .
Here’s how we get there:
Start by entering your desired ZIP code. Local property values and property taxes are key determinants of affordability.
Next, enter your pretax income.
Put in the amount you’re planning to save for a down payment.
Estimate your monthly budget’s nonnegotiables, like car payments and credit card debt. Don’t include musts or nice-to-haves the calculator leaves a cushion for that.
Last, estimate your credit score. Your credit score affects what interest rate lenders will offer you. When more of your mortgage payment goes toward servicing interest, there’s less left over to pay for the actual home.
Once you’ve got your results, you can adjust the variables to see how your costs would change if, for example, you made a larger down payment or you substantially changed your credit score. You can also add or alter parts of the mortgage payment, like homeowner association fees or private mortgage insurance.
The Conservative Model: 25% Of After
On the flip side, debt-hating Dave Ramsey wants your housing payment to be no more than 25% of your take-home income.
Your mortgage payment should not be more than 25% of your take-home pay and you should get a 15-year or less, fixed-rate mortgage Now, you can probably qualify for a much larger loan than what 25% of your take-home pay would give you. But its really not wise to spend more on a house because then you will be what I call house poor. Too much of your income would be going out in payments, and it will put a strain on the rest of your budget so you wouldnt be saving and paying cash for furniture, cars, and education.
Notice that Ramsey says 25% of your take-home income while lenders are saying 35% of your pretax income. Thats a huge difference! Ramsey also recommends 15-year mortgages in a world where most buyers take 30-year mortgages. This is what Id call conservative.
What Is A Mortgage Payment
Your mortgage payment is the amount of money you must pay every month to pay down, and ultimately pay off, your mortgage loan. Your mortgage payment covers both the principal and the interest on the loan. It can also include mortgage default insurance, also sometimes known as CMHC insurance , property taxes and other fees. When you first begin making payments, more of it goes towards covering interest, but over time, more of your payment will eventually go to paying down your mortgage balance.
General Guideline: 3x To 45x Annual Income
Lenders typically like to see borrowers put at least 5% down on their property. When borrowers put down less than 5% they are typically charged a significantly higher interest rate to offset the additional risk the lender is taking.
Borrowers can typically borrow from 3 to 4.5 times their annual income. Lenders may allow borrowers to borrow up to 5 times their annual income, though regulatory restrictions prohibit lenders from having more than 15% of their loans above 4.5 times annual income.
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.
You May Like: How To Qualify For Mortgage Modification
How To Use Our Mortgage Payment Calculator
The first step to determining what youll pay each month is providing background information about your prospective home and mortgage. There are three fields to fill in: home price, down payment and mortgage interest rate. In the dropdown box, choose your loan term. Dont worry if you dont have exact numbers to work with – use your best guess. The numbers can always be adjusted later.
For a more detailed monthly payment calculation, click the dropdown for Taxes, Insurance & HOA Fees. Here, you can fill out the home location, annual property taxes, annual homeowners insurance and monthly HOA or condo fees, if applicable.
What Costs Are Built Into A Monthly Fha Mortgage Payment
NerdWallets FHA loan calculator considers the following costs when estimating your monthly FHA loan payments:
Principal. This is the amount you owe on the loan what you borrowed minus your down payment. For example, if you buy a $250,000 home and put down 10% , the principal would be $225,000.
Interest. This is the cost of borrowing the money from a lender, expressed as an annual percentage.
Property taxes. Annual taxes assessed by a government authority on your home and land are often collected as a part of your payment and paid through an escrow account.
FHA mortgage insurance. This is a cost built into FHA loans. Youll make an upfront premium payment at closing, while ongoing premiums are factored into your monthly payment.
Homeowners association fee. If you’re buying a house, townhome or condo that is governed by a homeowners organization, you may have to pay monthly or annual dues that cover upkeep and improvements to shared amenities.
Don’t Miss: Is Reverse Mortgage Worth It
Why Does Your Monthly Calculator Have Four Columns
We think it’s important for you to compare your options side by side. We start the calculator by outlining the four most common options for down payment scenarios, but you are not limited to those options. We also allow you to vary amortization period as well as interest rates, so you’ll know how a variable vs. fixed mortgage rate changes your payment.
How Do Mortgage Points Work With Arm Loans
Mortgage points on an adjustable-rate mortgage work like points for a fixed-rate mortgage, but most ARMs adjust at five years or seven years, so its even more important to know the breakeven point before buying points.
Factor in the likelihood that youll eventually refinance that adjustable rate because you may not have the loan long enough to benefit from the lower rate you secured by paying points, says McBride.
Because the points only apply to the fixed period of an ARM, most adjustable-rate borrowers do not use them, according to U.S. Bank.
You May Like: How To Get A Mortgage If Your Self Employed
Work With A Local Real Estate Agent Connect To Local Resources
Working with a local real estate agent is a valuable asset when buying real estate. You could say, real estate agents are a conduit of information for buyers and sellers. Agents work closely with title companies, mortgage lenders, inspectors, appraisers, and so on.
If you’re thinking about buying or selling, start by contacting a local agent. They can give you direction to get started, resources to find our how much mortgage you can afford, and get set up with listing alerts for the market you’re interested in buying or selling.
How Much House Can I Afford With An Fha Loan
To calculate how much house you can afford, weve made the assumption that with at least a 20% down payment, you might be best served with a conventional loan. However, if you are considering a smaller down payment, down to a minimum of 3.5%, you might apply for an FHA loan.
Loans backed by the FHA also have more relaxed qualifying standards something to consider if you have a lower credit score. If you want to explore an FHA loan further, use our FHA mortgage calculator for more details.
Conventional loans can come with down payments as low as 3%, although qualifying is a bit tougher than with FHA loans.
Read Also: Can You Sell A House With A Mortgage On It
Using The Mortgage Qualifying Calculator
The Mortgage Qualifying Calculator is designed to be easy to use and largely self-explanatory. Just fill in the various fields with the information requested. Start by choosing if you want to base the calculation on your annual income, the purchase price of the home you’re looking at or the monthly payment you can afford. Then work down the page entering your other information and the calculator will figure out the other two values for you and display them in gray.
- Enter your annual income and the Mortgage Qualifying Calculator will determine the maximum purchase price you can afford and the associated monthly payment.
- Enter the purchase price and the calculator will tell you the income you need and the monthly payment required. Or,
- Enter the monthly payment you’re thinking of and the Mortgage Qualifying Calculator will tell you the income needed to qualify and the home purchase price that will cover.
Then go down the rest of the page entering the information requested. Your answers will be displayed in gray at the top of the page. Click “View report” for a detailed breakdown and an amortization report.
What Is Homeowners Insurance
Homeowners insurance is a policy you purchase from an insurance provider that covers you in case of theft, fire or storm damage to your home. Flood or earthquake insurance is generally a separate policy. Homeowners insurance can cost anywhere from a few hundred dollars to thousands of dollars depending on the size and location of the home.
When you borrow money to buy a home, your lender requires you to have homeowners insurance. This type of insurance policy protects the lenders collateral in case of fire or other damage-causing events.
Don’t Miss: What Changes Mortgage Interest Rates
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.
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.
Recommended Reading: Can You Have 3 Mortgages On One Property
How To Use The Mortgage Affordability Calculator
To use our mortgage affordability calculator, simply enter your and your partnerâs income , as well as your living costs and debt payments. The calculator can estimate your living expenses if you donât know them.
With these numbers, youâll be able to calculate how much you can afford to borrow. You can also change your amortization period and mortgage rate to see how that would affect your mortgage affordability and your monthly payments.
Help To Buy Shared Ownership
Under the shared ownership program, you can purchase a share of your home and pay rent on the remaining mortgage balance until its cleared. This enables you to purchase between 25% to 75% of your propertys full price. To be eligible, you must be a first-time homebuyer, or you used to own a house but now have limited income to afford one. This scheme is also available for current shared owners planning to move. It also imposes required incomes limits. To qualify, your annual household income must be £80,000 or less outside of London. If you reside in London, your annual household income must be £90,000 or less. To learn more about the Help to Buy shared ownership scheme, visit their official site.
Recommended Reading: What Are The Rates On A 30 Year Fixed Mortgage
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.